Effects of Credit Risk and Working Capital on Capital Adequacy for Commercial Banks in Kenya

Abstract

Capital adequacy has been constantly growing in the banking sector in Kenya and is a key factor in determining the continuity of the commercial banks in Kenya. However capital adequacy is affected by such factors as working capital ratio, credit risk and the size of the bank in terms of total assets held. The purpose of this study was to provide a better understanding on the factors affecting capital adequacy in the commercial banks in Kenya. Based on this research objective, a review of the relevant literature has been conducted, which was used to guide this study's data collection. A descriptive research design was employed. The target population of interest in was all the 43 commercial banks in Kenya. The data was collected from the secondary sources. The data was obtained from the CBK financial reports of 2013 for all the banks in Kenya and then analyzed using SPSS version 20. The findings have been presented in tables for easy interpretation and report writing. The study has established that there is direct relationship between capital adequacy, credit risk, working capital ratios and size of the bank. The study findings indicated that, the capital adequacy of the commercial banks and working capital has positive and strong correlation which is also significant tested at 5% level. This is as indicated by the Pearson coefficient value of 0.861 which is a strong and positive correlation coefficient. Thus, the findings indicate that there is a strong positive association between capital adequacy and working capital.