Effect Of Financial Regulations On Financial Performance Of Commercial Banks In Kenya

Abstract

The study aimed at determining the effect of financial regulations on financial performance of commercial banks in the Kenyan banking sector. The Central bank of Kenya (CBK) is entrusted with the responsibility of ensuring that the Kenyan banking environment is conducive to operate through establishment of rules and regulations. These regulations have been established around the capital, asset, management, efficiency and liquidity system of rating the commercial banks due to its approach to quantify the soft notion of banks safety. The main objective was therefore to determine the effect of financial regulations on financial performance of commercial banks in Kenya. More specifically, the study sought to determine the effect of each of the capital, assets, management and liquidity regulations on the financial performance of commercial banks in Kenya both within the entity and between entities. The theoretical framework is construed around the public interest theory, private interest theory of regulations as well as the information asymmetric theory. Descriptive design was adopted in analyzing the 37 commercial banks targeted. The relevant panel data was gathered from the (CBK) database for six years starting from the year 2010 - 2015 and analyzed using the linear panel regression models. The findings were presented using graphs and tables, the results indicated that capital adequacy regulations and liquidity regulations have a positive effect on the variation of financial performance while asset quality regulations and management efficiency regulations affect the financial performance of bank in Kenya negatively. Capital adequacy, asset quality and liquidity regulations were statistically insignificant while management efficiency was statistically significant at 95% confidence level. Recommendations call for continuous review of the credit regulations, employment of sound techniques in the management of bank’s operations as well as invitation of scholars to undertake thorough research on the impact of the specific regulations.