An Assessment of the extent of implementation of Basel II Accord in Kenyan Commercial Banks and its implication on their profitability

Abstract

Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. Initially published in June 2004, it was intended to create an international standard for banking regulators. It is widely recognized that Basel II is a major breakthrough in theoretical and practical world of banking industry and a dynamic framework which will be able to adapt to ongoing innovation and change. This study seeks to examine the extent of Basel II adoption in Kenyan commercial banks and how this affects their profitability. It seeks to raise ideas and issues in the hope that the various stakeholders and persons directly addressing issues related to Basel II requirements in the banking sector in Kenya will continue the discussion. The study will make a significant contribution to the growing body of research on Basel II requirements on Kenya’s banking sector. In addition, other academic researchers may need the study findings to stimulate further research in this area and as such form a basis of good background for further researches. The research design was descriptive using both quantitative and qualitative data. Target population was forty three respondents. The study used the entire population to do the study. That means that census method was used as sampling technique. Data was collected using questionnaires and interview and analysed with tables and charts. The findings of the study indicate that the extent of implementation is directly related to profitability. This is because over time, well-managed banks would benefit from better market conditions, while poorly managed banks would face penalties. The improvements in risk management that Basel II is intended to drive may enhance risk culture, reduce volatility of all risks, lower provision for bad debts, reduce operational losses, improve the institutions’ external ratings, and thereby help ensure access to capital markets and raise organizational efficiency. The study recommends that banks should move in a structured way toward the use of the advanced approaches to credit and operational risk. However, to meet that goal, banks will need to develop and use quantitative models that are acceptable to regulators. Appropriately designed and implemented, such models can enable banks to measure and monitor risks across the organization, enhance risk management and ultimately determine capital requirements.