The effect of prudential regulation on the stability of commercial banks in Kenya
The contribution of commercial banks to the growth of Kenya's economy lays great emphasis on sound management of the institutions. Achieving stability in the banking industry has taken great effort from the government through its regulatory body, the Central Bank of Kenya. It is in recognition of their importance to the economy and the desire to ensure their continued existence that various measures have been taken to protect these institutions from financial instability. They include the introduction of prudential regulations which have guided commercial banks in conducting their business while cultivating a culture of fair competition in the industry. This research evaluated the impact of prudential regulations on the stability of commercial banks in Kenya. It involved a census study of the forty four commercial banks operating in the country. Secondary data obtained from the Central Bank of Kenya and the Deposit Protection Fund Board was used. The supervisory and regulatory role of the CBK as well as measures taken to enhance banking stability in other continents such as Australia was comprehensively examined. The concepts of Financial and Prudential regulation were studied and their contribution to enhancing banking stability highlighted. Also covered were theories on bank regulation, the CBK prudential guidelines as well as the core principles for effective banking supervision. For the prudential regulations to achieve the intended results there is need for commitment and active participation of all stakeholders in the industry. The research underscored the need to strengthen and improve the institutional environment for regulation. In the event of financial distress, various bank intervention measures were recommended with great attention to prompt corrective action. The role of the Deposit Protection Fund Board was highlighted with emphasis on its contribution in protecting depositors' funds and enhancing investor confidence in the banking industry. The performance of the commercial banks was measured by the Return on Assets (ROA) with the Standard Deviation, the less stable the banks were deemed to be. The effect of prudential regulations was assessed by comparing the Standard Deviation of the Return on Assets for the period prior to implementation to that of the period after implementation of the regulations. The study covered the period running from 1995 to 1998 (prior to implementation of prudential regulations) as well as 1999 to 2002 (after implementation of the regulations). The Standard Deviation of the Return on Assets for the period stretching from 1995 to 1998 was compared to the Standard Deviation of the ROA for the period running from 1999 to 2002. The research showed that the Standard Deviation for the period after implementation was lower than that for the period prior to implementation of prudential regulations. From the results, it was concluded that the implementation of prudential regulations in 1998 substantially enhanced the stability of commercial banks in Kenya.