Determinants of capital adequacy of commercial banks in Kenya

Abstract

This study aimed at identifying the most important factors that determine Capital Adequacy of Commercial Banks in Kenya for the period 2009 – 2013 using Multiple Linear Regression Analysis and the Correlation Coefficient (Pearson Correlation). The target population comprised all registered commercial banks in Kenya in a five year period 2009 to 2013. Secondary data was used from Nairobi Securities Exchange for listed banks and management of banks that are not listed. Following the financial crisis of the 2007-2009, stringent regulatory measures, such as higher capital requirements have become more prominent as a move towards having stable and more competitive banking sector. Banks play a critical role in the allocation of society’s limited savings among the most productive investments, and they facilitate the efficient allocation of the risks of those investments. The study showed that there existed a significant relationship between capital adequacy and capital risk. There was no existence of a significant relationship between capital adequacy and the following: liquidity risk, credit risk, interest rate risk, return on assets ratio, return on equity ratio and revenue power ratio. As shown by the findings of the study, the liquidity risk, credit risk, capital risk, interest rate risk, return on asset ratio, return on equity ratio and revenue power ratio combined with a relatively high effect on the Capital Adequacy and the changes that occur within, as the percentage of the interpretation reached approximately eighty one percent. Since the P-value of the F-test is less than alpha, the overall conclusion of the study was that there is a significant relationship between the Liquidity Risky Assets, Credit Risks, Capital Risks, Interest Rate Risks, Return on Asset Ratio, Return on Equity Ratio and Revenue Power Ratio and Capital Adequacy. On this basis of the findings the study recommends that report of financial statements and data should include rules and basis on which capital adequacy measurement is based, which will lead to raising banking and finance awareness that will enhance banks competitive positions with regional and international banks