Capital and Financial Performance of Commercial Banks in Kenya

doi:10.7176/ejbm/14-2-04

Abstract

Well capitalized commercial banks do not incur penalties imposed by regulatory authorities hence improving their performance. However, despite the mitigating efforts by the central bank of Kenya, commercial banks have recorded a decline in performance as noted by reduction of average return on assets over the period of study, that is; 4.7% in 2013, 3.4% in 2014, 2.9% in 2015, 3.3% in 2016, 2.7% in 2017, 2.7% in 2018, 2.6% in 2019 and 1.7% in 2020. The study sought to establish the effect of capital on performance of commercial banks in Kenya by adopting a causal research design. The target population included 38 commercial banks operating in Kenya between 2013-2020. Secondary panel data was collected from the banking supervision and individual bank’s published annual reports. Data analysis involved descriptive statistical analysis so as to determine the trend of the study variables while linear regression was used to test the relationship between capital and financial performance. Findings of the study were presented using tables and narrations while hypotheses were tested at a significance level of 0.05. The study found out that capital significantly influenced financial performance of commercial banks in Kenya. The study recommends that commercial banks should build up their capital base in order to improve performance in the long run. Keywords: Capital, Performance, Commercial banks DOI: 10.7176/EJBM/14-2-04 Publication date: January 31 st 2022

Highlights

Capital is the amount of shareholder’s funds that a regulator directs banks to maintain as per the prudential guidelines (Chinoda, Chingombe & Chawuruka, 2015)
The descriptive statistics in table 2 shows that financial performance had a mean of 0.03 with a minimum of zero and a maximum of 0.5
5.0 Conclusion and Recommendations This study analyzed the effect of capital on financial performance of commercial banks in Kenya using positivism research philosophy and causal research design

Summary

Introduction

Capital is the amount of shareholder’s funds that a regulator directs banks to maintain as per the prudential guidelines (Chinoda, Chingombe & Chawuruka, 2015). In Basel accord requirements capital is the main quantitative evaluation criterion for evaluating commercial banks conditions for risk adjustments (Abdalla & Noor, 2014). Capital are assessed on attributes such as risk management incentives adopted by commercial banks. Banks tend to hold more capital above the level required by the regulatory authority or increases their capital when it nears the required level for the fear to incur penalties imposed by regulatory authorities (Assfaw, 2018; Odonkor & Barmor, 2012). Assfaw (2018) noted that banks holding more capital tend to invest in risky portfolios Banks tend to hold more capital above the level required by the regulatory authority or increases their capital when it nears the required level for the fear to incur penalties imposed by regulatory authorities (Assfaw, 2018; Odonkor & Barmor, 2012). Assfaw (2018) noted that banks holding more capital tend to invest in risky portfolios

Methods

Results

Conclusion