CAPITAL ADEQUACY REGULATION EFFECT ON PROFITABILITY OF COMMERCIAL BANKS LISTED IN NAIROBI SECURITIES EXCHANGE IN KENYA

Magdalene Mwende Gitari, Shano Mohamed

Abstract


Commercial banks’ working environment is the most highly regulated environment around the globe and this explains why banking regulations continually attract theoretical scrutiny. In Kenya, the Central bank of Kenya sets the rules and the regulations that every bank is supposed to operate by. Such regulations and guidelines are important as they are meant to protect the interest of depositors, creditors and investors as well as promoting integrity in financial markets. Commercial banks in Kenya have faced challenges related to performance that include decline in profits, being placed under receivership while at the same time registering high number of nonperforming loans. This has happened in the wake of revision of guidelines and regulations under CBK Act (Chapter 491, Kenyan law). This study therefore, sought to investigate the effect of capital adequacy regulations on profitability of commercial banks that are listed by Nairobi Securities Exchange. This research applied a descriptive research design. Population of interest were managers at the three levels of management; risk and compliance, credit and finance department in all 11 registered commercial banks which are listed in the NSE. This research used secondary data and primary data. A pretest was done to enhance reliability and validity of the research instrument. Both qualitative and quantitative data was produced by the research. The researcher further used regression analysis to test the relationship between capital adequacy regulation and profitability of commercial banks. The results show that capital adequacy management play an important role in ensuring smooth banking operation in that sufficient capital helped in cushioning risk such as default in loan repayment. The study concludes that revision of CBK's prudential guidelines and regulation fostered a positive performance by commercial banks that are listed at the NSE. It’s therefore paramount for banks to continue ensuring that they have sufficient capital in place. 

References


Aiyar, S., Calomiris, C. W., & Wieladek, T. (2016). How does credit supply respond to monetary policy and bank minimum capital requirements?. European Economic Review, 82, 142-165.

Alkadamani, K. (2015). Capital adequacy, bank behavior and crisis: Evidence from emergent economies. European Journal of Sustainable Development, 4(2), 329-329.

Andrés, P. D., Reig, R., & Vallelado, E. (2018). European Bank’s Executive Remuneration Under the New European Banking Regulation. Journal of Economic Policy Reform, 22(3), 208-225.

Atieno, R. (2011). Formal and Informal Institutions’ Lending Policies and access to Credit by Small- Scale Enterprises in Kenya: An Empirical Assessment. Research Paper Number 111. African Economic Research Consortium, Nairobi.

Baltagi, B. H., & Rich, D. P. (2005). Skill-biased technical change in US manufacturing: a general index approach. Journal of Econometrics, 126(2), 549-570.

Barth, J. R., Caprio, Jr.G., Levine R. (2016). The regulation and supervision of bank around the world: a new database. In: Litan R.E., and Herring, R. (Eds), Integrating Emerging Market Countries into the Global Financial System. Brookings-Wharton Papers in Financial Services, Brooking Institution Press, pp. 183-240.

Barth, J.R., Caprio, Jr.G., Levine R. (2014). Bank regulation and supervision: what works best? Journal of Financial Intermediation 13, 205-248.

Beckmann, R. (2017). Profitability of Western European banking systems: Panel Evidence on structural and cyclical determinants. Series 2: Banking and Financial Studies, 17, 2007.

Bridges, J., Gregory, D., Nielsen, M., Pezzini, S., Radia, A., & Spaltro, M. (2014). The impact of capital requirements on bank lending.

Bridges, J., Gregory, D., Nielsen, M., Pezzini, S., Radia, A., & Spaltro, M. (2014). The impact of capital requirements on bank lending.

Calem, P., & Rob, R. (2017). The Impact of Capital-Based Regulation on Bank Risk-Taking. Journal of Financial Intermediation 8, 317-352.

Doyle, T. Y. (2005). Difference between guidelines and rules. Ty Doyle, partner at litigation boutique, J.D. Stanford.

Edirisuriya, P., & O'Brien, G. C. (2011). Financial deregulation and economies of scale and scope: evidence from the major Australian banks. Asia-Pacific Financial Markets, 8(3), 197-214.

Engelmann, F. (2011). Use of biotechnologies for the conservation of plant biodiversity. In Vitro Cellular & Developmental Biology-Plant, 47(1), 5-16.

Gavilá, S., García-Herrero, A., & Santabárbara, D. (2009). What explains the low profitability of Chinese banks?. Journal of Banking & Finance, 33(11), 2080-2092.

Hantke-Domas, M. (2003). The public interest theory of regulation: non-existence or misinterpretation?. European journal of law and economics, 15(2), 165-194.

Koch, S. (2015). Einführung in das Management von Geschäftsprozessen: Six Sigma, Kaizen und TQM. Springer-Verlag.

Kosmidou, K. (2008). The determinants of banks' profits in Greece during the period of EU financial integration. Managerial Finance, 34, 146-159.

Kosmidou, K. (2008). The determinants of banks' profits in Greece during the period of EU financial integration. Managerial Finance, 34, 146-159.

Leippold, M., Trojani, F., & Vanini, P. (2011). Multiperiod mean-variance efficient portfolios with endogenous liabilities. Quantitative Finance, 11(10), 1535-1546.

Mugenda, A. G. (2008). Social science research: Theory and principles. Nairobi: Applied.

Nzoka, F. K. (2015). The effect of assets quality on the financial performance of commercial banks in Kenya (Doctoral dissertation, University of Nairobi).

Nzongang, T., & Atemnkeng, J. (2006). Market Structure and Profitability Performance in the Banking Industry of CFA countries: the Case of Commercial Banks in Cameroon.[Online] May 2006.

Olalekan, A., & Adeyinka, S. (2013). Capital adequacy and banks’ profitability: an empirical evidence from Nigeria. American International Journal of Contemporary Research, 3(10), 87-93.

Pennacchi, G. (2006). Deposit insurance, bank regulation, and financial system risks. Journal of Monetary Economics 53, 1-30.

Richard, R. J (2011). The relationship between regulators and the regulated in banking. Chicago: Federal Reserve Bank of Chicago.

Sangmi, M. U. D., & Nazir, T. (2010). Analyzing financial performance of commercial banks in India: Application of CAMEL model. Pakistan Journal of Commerce and Social Sciences (PJCSS), 4(1), 40-55.

Sangmi, M. U. D., & Nazir, T. (2010). Analyzing financial performance of commercial banks in India: Application of CAMEL model. Pakistan Journal of Commerce and Social Sciences (PJCSS), 4(1), 40-55.

Sherman, M. (2009). A short history of financial deregulation in the United States. Center for economic and policy research, 7.

Yilmaz, M., & Christofori, G. (2009). EMT, the cytoskeleton, and cancer cell invasion. Cancer and Metastasis Reviews, 28(1-2), 15-33.


Refbacks

  • There are currently no refbacks.