EVALUATION OF THE EFFECTS OF CAPITAL ADEQUACY ON FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA
EVALUATION OF THE EFFECTS OF CAPITAL ADEQUACY ON FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA
Margaret Nyaboke Nyanyuki - Department of Accounting and Finance, School of Business and Economics, Kisii University, Kenya
Andrew Nyanga’u - Department of Accounting and Finance, School of Business and Economics, Kisii University, Kenya
Mactosh Onwonga - Department of Accounting and Finance, School of Business and Economics, Kisii University, Kenya
ABSTRACT
Financial performance of commercial banks is affected by capital adequacy determinant. Capital adequacy is one of the lending determinant and it influence financial performance of listed commercial banks. This contributed immensely to profit and other revenue to the bank. Lending is through offering loans which can be either short term, medium or long term depending on the need. The major objective of this study was to assess effect of capital adequacy on financial performance of commercial banks in Kenya. The specific objective was; to examine the effect of capital adequacy on financial performance of commercial banks in Kenya. The study was anchored on capital buffer theory. The study adopted correlational designs. The target population comprised of 43 listed commercial banks, and purposive sampling technique was used to select 10 commercial banks. The study used financial statements from which secondary data was extracted from Nairobi security exchange from the year 2015 -2019. Inferential statistics was used. The study established that capital adequacy determinant was negatively associated with financial performance of commercial banks in Kenya r=-.386(**), P=.006<0.01 and it has significant effect. The study concluded that capital adequacy had a negative but significant effect on financial performance of commercial Banks in Kenya. Hence, a unit change in capital adequacy led to a significant change on financial performance of commercial Banks. A bank with a high capital adequacy ratio is considered to be above the minimum requirements needed to suggest solvency. Therefore, the higher a bank's CAR, the more likely it is to be able to withstand a financial downturn or other unforeseen losses. Thus high capital adequacy would to a decline in financial performance of commercial in Kenya. The study recommended that banks can increase their regulatory capital ratios by either increasing their levels of regulatory capital (the numerator of the capital ratio) or by decreasing their levels of risk-weighted assets (the denominator of the capital ratio) and capital reserves all the time for better financial performance. Further another study can be done in other financial institutions.
