The effects of Central Bank of Kenya Prudential Regulations on financial performance of Commercial Banks in Kenya

Abstract

Despite introduction of CBK prudential regulations of 2006 governing commercial banks in Kenya, there are no systematic studies that critically assess how regulations have affected the financial performance of commercial banks. Thus this study sought to establish the effects of CBK Prudential Regulations of 2006 on the financial performance of commercial banks in Kenya. This was a comparative study on the effects of CBK Prudential Regulations of 2006 on the financial performance of commercial banks. The study covered a twelve year period from 2001 to 2012; six years prior to implementation of the prudential regulations (2001-2006) and six years after implementation of the prudential regulations (2007-2010). The descriptive research methodology was adopted in this study. The population of interest in this study consisted of all the duly licensed commercial banks operating in Kenya. The study used secondary quantitative data to determine the effects of CBK Prudential Regulations of 2006 on the financial performance of commercial banks. The data was sourced from Central Bank of Kenya’s Bank Supervision Department. These were in form of financial reports of the banks involved covering a twelve year period from 2001 to 2012. Regression analysis was used to analyze the data. The study revealed that there was great positive variation on the financial performance of commercial banks due to changes in Capital Adequacy, Liquidity Management, Risk Classification of Assets and Provisioning, Foreign Exchange Risk Exposure and Corporate Governance. This is an indication that CBK prudential regulations had great positive effects on the financial performance of commercial banks. The adjusted R squared value for the period after introduction of CBK prudential regulations 2006 was found to be greater than that of the period prior to to the regulations an indication that the regulations greatly influenced the financial performance of commercial banks. The study recommended the need for CBK to enhance their prudential regulations on commercial banks in Kenya, as it was revealed that CBK prudential regulations enhance the financial performance of commercial banks in Kenya. However, a holistic and integrated regulatory policy approach is advocated to strengthen market regulation without stifling competition, innovation and financial access.