Abstract
The main objective of this study was to determine effect of capital efficiency on default risk in commercial banks in Kenya. According to the bank supervisory report, the interest rate spread widened to 13 per cent at the end of December 2011 from 10.3 per cent by December 2010 which the CBK Governor termed as a sign of inefficiency in the banking sector. Secondary data was used in the study and descriptive survey design was applied. The target population was 42 Commercial Banks in Kenya out of which 2 were under receivership and 1 was under statutory management. Panel data for 39 commercial banks for the six years period from 2014 to 2019 were obtained from the CBK and individual bank websites. The study was guided by Agency theory, Moral hazard theory and Stakeholders theory. Descriptive statistics, correlation analysis and random and fixed effects were used for secondary data using E-views software. The findings indicated correlation coefficients of capital adequacy and return on equity of -0.14 and -0.11 respectively signifying a negative correlation between capital efficiency and non-performing loans. It was recommended that capital efficiency be strengthened to reduce non perfuming loans.
 
 JEL: G10; G20; G21
 
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Highlights
Capital efficiency refers to the ability of a bank to generate the highest return on capital invested
According to the bank supervisory report, the interest rate spread widened to 13 per cent at the end of December 2011 from 10.3 per cent by December 2010 which the CBK Governor termed as a sign of inefficiency in the banking sector (CBK, 2011)
3.3 Data Collection Instruments Secondary data was collected using audited and published financial statements from the websites of the Central Bank of Kenya to establish the relationship between bank efficiency and default risk in commercial banks in Kenya
Summary
Capital efficiency refers to the ability of a bank to generate the highest return on capital invested. It relates to the ratio of output in comparison to the amount of capital expenditure involved in maintaining the operation of a bank business (Hyz, 2010). This increase in competition could at least in the short-term lead to greater and possibly excessive risk-taking. This is because increased competition reduces the market power of banks thereby decreasing their charter value. The decline in bankscharter values coupled with the banks’ limited liability and the existence of ‘quasi’ flat rate deposit insurance, could encourage banks to take on more risk (Matutes C. & Vives X., 2018)
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