The effect of Basel II requirement on Kenyan commercial banks' lending

Abstract

Since 1999 the Basel Committee on Banking Supervision has been working on a revised Capital Accord, which should align regulatory capital requirements with the actual risk associated with banks' assets calculated with modern risk management techniques. The new Accord will increase regulatory capital for lower rating classes and, as a consequence, many observers feared that bank lending would decline (Taylor, 2006). The aim of this paper was to investigate this claim bringing to bear a new and comprehensive dataset of Kenyan bank lending. The study adopted descriptive study design. The populations for this research are the 43 listed Commercial Banks in Kenya analyzed for a period from 2009-2012. The study found that commercial banks risk weighted assed had increased by 79% over the years indicating a similar growth in bank's assets. To meet the asset growth, core capital also increased by 88% with bank's undertaking rights issue between 2011 and 2012 in order to meet the new capital requirements with Basel II. Total loans and advances with a risk weight of 100% also increased by 77% from the year 2009 to 2012. The CAMEL rating also showed continuous growth in all the key ratios over the years under review. The study concludes that Basel II requirement has an impact on banks' capital requirement and asset growth with growth in core capital and risk weighted assets clearly seen over the years. The risk weighted assets growth declined from 26% between 2008 and 2009 to 15% between 2011 and 2012 indicating strained growth on banks assets with implementation of Basel II. The study concludes that Basel II requirement has a clear impact on banks' lending. None of the commercial banks so far is in breach of the minimum capital requirements of 8% as additional capital has being raised through rights issues however further studies need to be done to determine the sustainability of uptake of rights issues to meet capital requirements.