IMPORTANCE OF CAPITAL ADEQUACY REQUIREMENTS IN BASEL III FRAMEWORK FOR COMMERCIAL BANKS IN KENYA

Kevin N Kombo,Dr Amos Njuguna

doi:10.47672/ajf.161

Abstract

Purpose: The purpose of the study was to examine the importance of capital adequacy requirements in Basel III framework for commercial banks in KenyaMethodology: A descriptive survey design was applied to a population of 43 commercial banks operating in Kenya. The target population composed of the 159 management staff currently employed at the head offices of the various commercial banks in Kenya. The population was composed of Senior, Middle and Junior or Entry level Management staff. A sample of 30% was selected from within each group. Primary data was gathered using questionnaires which were dropped off at the bank’s head offices and picked up later when the respondents had filled the questionnaires.Descriptive analysis was used to analyze quantitative data while content analysis was used to analyse qualitative data.Results: The study concludes that capital adequacy requirement is perceived to be important in commercial banks. The study thus deduces that financial stability, credit risk management, reduced vulnerability to liquidity shocks balance sheet structure and deposit insurance affect the capital requirement of the commercial banks in Kenya. In addition, the study concluded that Basel III increases capital requirements for counterparty credit risk arising from derivatives, repurchase agreements and securities financing activities.Unique contribution to theory, practice and policy: The study recommends that banks should ensure a flexible Basel III management expertise that delivers speed, accuracy, and performance to deliver competitive advantage.

Highlights

1.1 Background of the StudyThe global financial crisis of 2009-2010 spurred the need to review the regulatory framework of banks across the globe
The study concludes that capital adequacy requirement is perceived to be important in commercial banks
The study deduces that financial stability, credit risk management, reduced vulnerability to liquidity shocks balance sheet structure and deposit insurance affect the capital requirement of the commercial banks in Kenya

Summary

Introduction

The global financial crisis of 2009-2010 spurred the need to review the regulatory framework of banks across the globe. Reforms were necessary to rectify flaws in the regulatory framework. The Basel Committee on Banking Supervision (BCBS) is leading efforts to reform the global banking regulatory framework (BCBS, 2010a). In December 2010, BCBS announced Basel III proposals which national regulators and regional supervisory organisations are reviewing to evaluate its suitability to conditions in their own financial systems. According to Bean (2009), the banks were undercapitalised which is one of the reasons behind the 2007-2010 financial crises. The financial crisis 2007-2009 still has effects on international financial markets and the real economy

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