CAMEL Approach and Financial Sector Sustainability of Commercial Banks in Rwanda: A Case of Bank of Kigali, Rwanda

Abstract

The study analyzed the CAMEL approach and financial sector sustainability of commercial banks in Rwanda, with data collection at the Bank of Kigali (BK). The specific objectives were to find out the effects of capital adequacy on the financial sustainability of Bank of Kigali; to examine the effects of asset quality on the financial sustainability of Bank of Kigali; to evaluate the effects of management efficiency on the financial sustainability of Bank of Kigali; to analyze the effects of Earnings sufficiency on the financial sustainability of Bank of Kigali, and to evaluate the effects of liquidity on the financial sustainability of Bank of Kigali. The qualitative and descriptive approaches were applied in this study with linear regression showing the relationship between two variables using SPSS IBM 22.0 version. The target population of this study was 51 employees from BK headquarters, and 51 respondents are the sample size. Sampling procedures were used is purposive sampling procedure for selecting participants of this study. The questionnaire and interview guide, documentary techniques were used by the researcher to obtain the information for this study. Descriptive statistical methods and linear regression analysis test was used in the analysis of this study. Findings indicated that there is a strong correlation between capital adequacy and financial sector sustainability as Pearson correlation is 0.784** with the p-value of 0.000, which is less than both standard significance levels of 0.05 and 0.01. The results show that there is a strong correlation between asset quality and financial sector sustainability as Pearson correlation is .799**. The p-value is 0.000, which is less than both standard significance levels of 0.05 and 0.01. The results show that there is a positive and very strong correlation between management efficiency and financial sector sustainability of BK as the Pearson correlation is .891**. The p-value is 0.000, which is less than both standard significance levels of 0.05 and 0.01. The results show that there is a strong correlation between earnings sufficiency and financial sector sustainability of BK as the Pearson correlation is .572**. The p-value is 0.000, which is less than both standard significance levels of 0.05 and 0.01. Findings show that there is a strong correlation between liquidity and financial sector sustainability of BK as Pearson correlation was 0.616**. The p-value is 0.000, which is less than both standard significance levels of 0.05 and 0.01. Findings revealed that the p-value is 0.000 which is less than both standard significance levels of 0.05 and 0.01 as it is an indicator of the existence of a significant relationship between the CAMEL approach and financial sector sustainability of BK since, as Pearson correlation value was 0.854** which is a positive and very strong correlation between two variables (CAMEL approach and financial sector sustainability of BK). Based on the findings obtained above, the study concludes that there is a significant and positive relationship between the CAMEL approach and the financial sector sustainability of BK, Rwanda. As a recommendation, Bank management should improve on the management of bank assets and liabilities, especially on the quality of assets portfolio and deposit liabilities to improve on the achievement of corporate objectives.