The Effect of Capital Adequacy Requirements on the Efficiency of Commercial Banks in Kenya

Abstract

Recent economic crises have revealed the importance of bank regulations to hedge against the high risk attributed to imbalances in banks’ balance sheets. The most important part of banking regulation is regulation on capital. Nonetheless, excessive regulations may have adverse effects. Safety of depositors’ fund remains the major concern of bank regulators. It is in this respect the capital adequacy becomes relevant and important.

The study adopted a descriptive research design. The population of interest in this study consisted of all 43 commercial banks operating in Kenya and has been in existence in the last five years, licensed and registered under the Banking Act Cap.488. To measure economic efficiency the study adopted the Data Envelopment Analysis (DEA) techniques.

The value of the F statistic indicated that the overall regression model is significant hence it has some explanatory value i.e. there is a significant relationship between the predictor variables of capital adequacy ratio and the efficiency of commercial banks in Kenya.

The study recommends that central bank should be keen on commercial banks capital adequacy ratio by laying down financial regulations on liquidity since the goal of financial regulation is to enable banks to improve liquidity and solvency. Stricter regulation may be good for bank stability, but not for bank efficiency, restricting banks may not only lower bank efficiency but also increase the probability of a banking crisis.