EFFECTS OF CENTRAL BANK REGULATORY

REQUIREMENTS ON FINANCIAL PERFORMANCE OF

COMMERCIAL BANKS IN KENYA

PAUL MUNENE MUIRURI

DOCTOR OF PHILOSOPHY
(Business Administration)

JOMO KENYATTA UNIVERSITY OF

AGRICULTURE AND TECHNOLOGY

2015

Effects of Central Bank Regulatory Requirements on Financial

Performance of Commercial Banks in Kenya

Paul Munene Muiruri

A Thesis Submitted in Partial fulfillment for the Degree of Doctor of

Philosophy in Business Administration of Jomo Kenyatta University of
Agriculture And Technology.

2015

DECLARATION
This thesis is my original work and has not been presented for a degree in any other
University.

Signature ...

Date

Paul Munene Muiruri

This thesis has been submitted for examination with our approval as University
Supervisors.

1. Signature ...

Date

Dr. Florence Sigara Memba

JKUAT, Kenya

2. Signature ...
Dr. Agnes Njeru
JKUAT, Kenya

ii

Date

DEDICATION
This thesis is dedicated to my late father Muiruri who never lived long enough to see the
academic achievement of his son. I also dedicate this work to my mum Peris Wangari and
my family specifically my wife Margaret Waithira; my lovely children Joy Wangari and
Ernest Muiruri. Many were the times they missed my attention when i was preparing this
thesis. Thank you very much for your encouragement, support and prayers.

iii

ACKNOWLEDGMENT
This thesis has been the fruit of a long journey, during which I have seen support of wide
range of people who made my dream a reality. My gratitude goes to the Almighty God who
enabled me to come this far in my studies by giving me peace of mind, grace and good
health when preparing this thesis.
Secondly, I would like to express my profound gratitude to my supervisors, Dr. Agnes
Njeru and Dr. Florence Memba for their inspiration, support, motivation and professional
guidance in writing this thesis. I am indeed grateful and do appreciate the knowledge and
research skills that I have gained from them.
Thirdly, I appreciate my Ph.D graduate classmates of the year 2012, particularly Mr.
Macharia and Gatuhi for the teamwork and encouragement in this journey. Finally, I am
indebted to my dear wife Margaret and children Joy and Ernest whose patience, love and
understanding saw me through during the ups and downs in the process of writing this
thesis. I appreciate their encouragement and understanding particularly for the many
weekends I was not with them as I worked on this thesis.
I would also want to say a big thank you to the managers of the commercial banks who
allowed me to collect data in their banks.
For those not mentioned but played a key role behind the scenes in making this thesis a
success I say, "Thank you very much."

iv

TABLE OF CONTENTS
DECLARATION...............................................................................................................ii
DEDICATION..................................................................................................................iii
ACKNOWLEDGMENT..................................................................................................iv
TABLE OF CONTENTS...................................................................................................v
LIST OF TABLES............................................................................................................ix
LIST OF FIGURES..........................................................................................................xi
LIST OF APPENDICES.................................................................................................xii
ACRONYMS AND ABBREVIATIONS.......................................................................xiii
DEFINITION OF TERMS............................................................................................xiv
ABSTRACT......................................................................................................................xv
CHAPTER ONE................................................................................................................1
INTRODUCTION.............................................................................................................1
1.1 Background of the Study...............................................................................................1
1.1.1 History of Central Bank Regulatory Requirements....................................................9
1.1.2 Effects of Central Bank regulatory requirements and Bank performance................12
1.1.3 Banking Industry in Kenya.......................................................................................18
1.2 Statement of the Problem.............................................................................................20
1.3 Objectives Of the Study...............................................................................................22
1.3.1 General Objective.....................................................................................................22
1.3.2 Specific Objectives...................................................................................................22
1.4 Research Hypotheses...................................................................................................23
1.5 Justification of the Study.............................................................................................23
1.6 Scope of the Study.......................................................................................................24
1.7 Limitations...................................................................................................................24
CHAPTER TWO.............................................................................................................25

LITERATURE REVIEW................................................................................................25
2.0 Introduction..................................................................................................................25
2.1 Theoretical Literature Review.....................................................................................25
2.2 Empirical Literature Review........................................................................................33
2.2.1Corporate Governance...............................................................................................33
2.2.2 Capital Requirement.................................................................................................36
2.2.3 Credit Risk Management..........................................................................................39
2.2.4 Liquidity Management.............................................................................................43
2.2.5 Bank Ownership and Financial Performance...........................................................47
2.2.6 Central Bank Regulatory Requirements and Financial Performance......................50
2.3 Critique of existing literature relevant to the study.....................................................55
2.4 Research Gaps and Summary......................................................................................58
2.5 Conceptual Framework................................................................................................59
CHAPTER THREE.........................................................................................................61
METHODOLOGY..........................................................................................................61
3.0 Introduction..................................................................................................................61
3.1 Research Philosophy....................................................................................................61
3.2 Research Design..........................................................................................................62
3.3 The Target Population..................................................................................................62
3.4 Sampling Technique and Illustrations..........................................................................63
3.4.1 Sampling Frame........................................................................................................63
3.4.2 Sample and sampling Technique..............................................................................63
3.5 The Instruments...........................................................................................................64
3.6 Data Collection Procedures.........................................................................................65
3.6.1 Pilot Test...................................................................................................................65
3.7 Data Processing and Analysis......................................................................................65
3.8 Empirical Model.........................................................................................................67
vi

3.8.1 Moderating effect model..........................................................................................68

3.8.2 Operationalization of Variables................................................................................69
CHAPTER FOUR...........................................................................................................70
RESULTS AND DISCUSSION.......................................................................................70
4.1 Introduction..................................................................................................................70
4.2 Pilot study results.........................................................................................................70
4.3 Summary statistics.......................................................................................................71
4.3.1 Primary data analysis................................................................................................71
4.3.2 Secondary Data Aanalysis.......................................................................................81
4.4 Discussion of Regression Results.............................................................................111
CHAPTER FIVE...........................................................................................................113
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS................................113
5.1 Introduction................................................................................................................113
5.2 Summary Of Findings................................................................................................113
5.3 Conclusions................................................................................................................114
5.4 Recommendations......................................................................................................115
5.5 Areas For Further Research.......................................................................................115
REFERENCES...............................................................................................................116
LIST OF APPENDICES................................................................................................123

vii

LIST OF TABLES
Table 1.1: Kenyas Financial System in Comparison to other Financial Systems......19
Table 3.1: Target population........................................................................................ 61
Table 3.2: Sampling Design.........................................................................................63
Table 3.3: Measurement of variables...........................................................................68
Table 4.1: Summary of Cronbachs Alpha Reliability Coefficient..............................70
Table 4.2: Response rate..............................................................................................70
Table 4.3: Level of Education of Respondents............................................................73
Table 4.4: Representation of Directors in the Board....................................................74
Table 4.5: Effects of Corporate governance on financial performance..................... 75
Table 4.6: Effects of Capital requirement on financial performance..........................76
Table 4.7: Effect of CBK regulatory requirements on financial performance.............77
Table 4.9: Effect of liquidity management on financial performance........................78
Table 4.10: Independent Variables one-Sample Statistics.......................................... 81
Table 4.11: Independent Variables One-Sample Test..................................................81
Table 4.12: Financial Performance of Commercial Banks in Kenya...........................82
Table 4.13: Results of Normality Diagnostic Test......................................................85
Table 4.14: Multicollinearity Test................................................................................86
Table 4.15: Autocorrelation test with ROE.................................................................87
Table 4.16: Autocorrelation test with ROA................................................................. 87
Table 4.17: ANOVA Corporate Governance and ROA.............................................87
Table 4.18: ANOVA Corporate Governance and ROE (Secondary Data)...............87
Table 4.20 : ANOVA Capital requirement and ROE............................................... 88
Table 4.21: ANOVA Credit risk transfer Management and ROA............................89
Table 4.22: ANOVA Credit risk Management and ROE........................................ 89
Table 4.23: ANOVA Liquidity Management and ROE (Secondary Data)............89

viii

Table 4.24: ANOVA Liquidity Management and ROE (Secondary Data)............90

Table 4.25: Five-Year Performance of Commercial Banks in Kenya........................90
Table 4.26:Banks Performance and Effects of CBK regulatory requirement.............92
Table 4.27: Regression Coefficients with ROA..........................................................96
Table 4.28: Regression Coefficients with ROE...........................................................97
Table 4.29: Model Summary with ROE...................................................................... 99
Table 4.30: Analysis of Variance ANOVAa with ROE.............................................99
Table 4.31: Model Summary with ROA....................................................................100
Table 4.32: Analysis of Variance - ANOVAb with ROA...........................................101
Table 4.33: Regression output using ROA...............................................................102
Table 4.34: Regression output using ROE...............................................................103
Table 4.35: Regression output as Moderated by Ownership Identity with ROA......107
Table 4.36 : Regression output as Moderated by Ownership Identity with ROE......108
Table 4.37: Coefficients of Determination before and after Moderation..................109

ix

LIST OF FIGURES
Figure 2.1: Conceptual framework .......................6Error: Reference source not found
Figure 4.1: Distribution of respondents profile.........................................................70
Figure 4.2: Respondents work experience................................................................730
Figure 4.3: Stocks Listing of the banks.......................................................................73
Figure 4.4: Bank Ownership Structure........................................................................ 81

LIST OF APPENDICES
Appendix i: Letter Of Authorization...............................................................................122
Appendix ii: Letter Of Introduction................................................................................123
Appendix iii: Study Questionnaire................................................................................ 124
Appendix iv: Secondary Data Collection Sheet........................................................... 128
Appendix v: Ranking of Commercial Banks in Kenya................................................. 130
Appendix vi: List Of Investment Banks In Kenya....................................................... 132
Appendix vii : Secondary data.......................................................................................132
Appendix viii: List of CBK Prudential Regulations (2006) for Commercial Banks......138
Appendix ix : Correlation Matrix effect of CBK regulatory requirement......................139

xi

ACRONYMS AND ABBREVIATIONS

BCBS

Basel Committee on Banking Supervision

BIS

Bank for International Settlement

CAMEL

Capital adequacy, Asset Quality, Management, Earning and Liquidity

CBK

Central Bank of Kenya

CBN

Central Bank of Nigeria .

CMA

Capital Market Authority

ERS

Economic Recovery Strategy

FIs

Financial Institutions

FSI

Financial Stability Institution

GDP

Gross Domestic Product

NBFI

Non-Banking Financial Institution

Ph.D

Doctor of Philosophy

P-value

Probability Value

ROA

Return on Assets

ROE

Return on Equity

S.E

Standard Error

SPSS

Statistical Package for Social Sciences

US$

United States of America Dollar

VIFs

Variance Inflation Factors

xii

DEFINITION OF TERMS
This study adopted the following definition of key terms:
Liquidity Management: It is defined as the ability of a financial institution to meet all
legitimate demands for funds.
Bank Regulatory Requirements: are form of government regulation, which subject
banks to certain requirements, restrictions and guidelines.
Capital requirement:

(also known as regulatory capital or capital adequacy) is the

amount of capital a bank or other financial institution has to hold as required by its
financial regulator. It acts as a buffer in case of adverse situation.
Commercial bank: It is a financial institution, which provides services such as accepting
deposits, giving business loans and auto loans, mortgage lending and basic investment
products like savings accounts and certificates of deposit.
Credit risk Management: Refers to identification, analysis and assessment, monitoring
and control of credit and this has direct implications on the amount of loans and advances
extended to customers as well as on the level of non-performing loans.
Financial performance of banks: It is defined as profitability, which accounts for the
impact of better financial soundness on bank risks bearing capacity and on their ability to
perform liquidity transformation.
Corporate Governance: it is the accountability of the management with regard to the
routine financial decision-making process. It is also the ratios that show what percentage of
gross from revenue went to pay interest, operating expenses and depreciation, and how
much balance left for net bank income.

xiii

ABSTRACT
The purpose of the study was to assess the effects of central bank regulatory requirements
on financial performance of commercial banks in Kenya. The study specifically focused on
the effects of: corporate governance, capital requirement, liquidity management and credit
risk management on financial performance of commercial banks. The study also assessed
the moderating effect bank ownership had on the relationship between effects of central
bank regulatory requirements and financial performance of commercial banks in Kenya.
The study employed descriptive research design. Both primary data and secondary data
were collected and that analyzed. For primary data collection, the study targeted 172 key
bank officials who were randomly sampled and data were collected by use of a
questionnaire. Secondary data was collected from most recent published annual financial
statements and banks supervision records at the Central Bank of Kenya, from 2009 to 2013.
The data obtained was cleaned; coded and statistical outputs generated using SPSS.
Descriptive and inferential statistics were employed to analyze the data. To determine the
effects of central bank regulatory requirements on financial performance of banks in
Kenya, measures of central tendency, dispersion and multi-regression analysis model were
used. The study results showed continuous growth CAMEL rating in all the key ratios over
the years under review. This continuous growth CAMEL rating could be attributed to CBK
regulatory requirements effects such as corporate governance, capital requirement, credit
risk management and liquidity management (F=1.433; P value=0.77 with ROE and F=0.94;
P value=0.442 with ROA). This confirms that CBK regulatory requirements are in factors
that influence bank performance. The findings further indicated that there was a strong and
positive correlation between effects of CBK regulatory requirements and financial
performance(R=0.794 with ROE and ROA).This confirms that these are part of the effects
central bank regulatory requirements and are important. Further from study results it was
evident that the Central Bank Regulatory requirements have positively contributed to
financial performance of commercial banks in Kenya. There was great variation on the
financial performance of commercial banks due to changes in Corporate Governance,
capital requirement, credit risk management and liquidity Management. This is an
indication that central bank regulatory requirements had great effects on the financial
performance of commercial banks. Finally the study found that bank ownership did not
xiv

have moderating effect on the relationship between bank performance and central bank
regulatory requirements in Kenya. The study concluded that corporate governance, capital
requirement, credit risk Management and liquidity management influenced the profitability
of commercial banks in Kenya. The study recommended that bank management should
leverage on volatile earnings .Bank managers should invest in liquid assets and also check
their credit policy and practices to boost their performance. Secondly, the regulator and
banks unions should design most applicable and convenient loan management protocols in
the industry that considers shortening of long channels. Lastly, shareholders need to know
that they have an important role in ensuring that the banks management are following and
implementing good corporate governance

xv

CHAPTER ONE

INTRODUCTION
1.1 Background of the Study
Bank regulations are a form of government regulation which subjected the banks to
certain requirements, restrictions and guidelines. This regulatory structure creates
transparency between banking institutions and the corporation with whom they conduct
business, among other factors. Regulations aimed at ensuring the safe and sound
operation of financial institutions, set by both state and federal authorities. Given the
inter-connectedness of the banking industry and its reliance on national and global
economy, it is important for regulatory agencies to maintain control over standardized
practice of these financial institutions. Supporters of such regulation often hinge their
arguments on the too big to fail notion. This holds that many financial institutions hold
too much control over economy to fail without enormous consequences (Financial
Stability Oversight Annual Report, 2003)
Well established banking systems are important factors of functioning financial systems.
These have been vividly proven by recent developments around the world. When
banking or more generally, financial systems temporarily break down or operate
ineffectively. The capacity of these firms to obtain funds necessary for ongoing existing
projects and pursuing new endeavors is curtailed. Severe interferences in the
intermediation process can even lead to financial crisis and in some cases, undo years of
economic and social development. Since 1980 more than 130 countries have
experienced banking problems that have been costly to resolve and disruptive to
economic development. This troublesome situation has led to calls for banking reform
by national governments and such international organizations as the World Bank and the
International Monetary Fund (Barth, Caprio & Levine ,2001).
Central bank is widely regarded as a vital part of the public safety net supporting the
stability of the banking system and financial markets. A central bank that is financially
independent and has a sizeable portfolio of securities can provide large amounts of

liquidity to institutions on very short notice. Indeed, central bank lending has been a
prominent part of regulatory assistance to troubled financial institutions for a long time.
The Central Bank of Kenya (CBK), like most other central banks around the world, is
entrusted with the responsibility of formulating and implementing monetary policy
directed at achieving and maintaining low inflation as one of its two principal objectives;
the other being to maintain a sound market-based financial system. The CBK was
established under the Central Bank Act (CAP 481) in 1966. The Act assigned to the
CBK the statutory objectives to assist in the development and maintenance of a sound
monetary and credit, banking system in Kenya, conducive to the orderly and balanced
economic development of the country and the external stability of the currency among
other functions. During the early years, the CBK relied mainly on moral persuasion. It
enlisted the support of banking institutions through regular meetings with the chief
executives of banks to explain the thrust of monetary policy initiatives. Being the
regulator of commercial banks and non-bank financial institutions, the CBK had some
influence in this regard (Mwega, 2009).
Central bank regulatory requirements for banking institutions refer to regulations and
guidelines issued by the Central Banks which subject banks to certain requirements,
restrictions and guidelines. Central bank regulatory requirements can also be defined as
legal framework for financial operations. The regulations are a significant contributor to
preventing or minimizing financial sector problems. The objectives of these regulations
are: 1) to reduce the level of risk to which bank creditors are exposed (i.e. to protect
depositors) 2) systemic risk reduction-to reduce the risk of disruption resulting from
adverse trading conditions for banks causing multiple or major bank failures, 3) avoid
misuse of banks to reduce the risk of banks being used for criminal purposes, such as
laundering the proceeds of crime and to protect banking confidentiality Credit allocation
to direct credit to favored sectors hence to provide the best customer service in this
competitive edge (CBK 2012).
Evidence shows that the absence of Central bank regulatory requirements in some key
areas can lead to bank failures and systemic instability. Establishing sound, clear and
easily monitored rules for financial activities both encourage managers to run their
institutions better and facilitate the work of supervisors. A major weakness of some

financial systems is the fact that various financial institutions, especially cooperatives
and intermediaries in rural areas, operate completely outside prudential regulations.
Some countries have one single general banking law, which tries to assemble all
regulations, but in many countries the operational issues are left to statutory notes,
circulars or even simply the routine decisions of the supervisory institution. Various
other laws can have an impact on the operation of financial institutions, e.g. company
laws, securities laws, debt recovery laws and laws on liquidation and bankruptcy
(Thumbi, 2014).
Kenya is currently using most aspects of Basel II; however, it is worth noting that the
CBK has decided to incorporate certain features of Basel III in the Prudential
Guidelines, particularly in relation to capital adequacy. Kenya is not a member of the
Basel Committee on Banking Supervision, but the CBK does adopt and incorporate
Basel standards when possible. The government of Kenya through its regulatory body,
the Central Bank of Kenya, has introduced prudential regulations to guide commercial
banks in conducting their business while cultivating a culture of fair competition in the
industry. The introduction of prudential guidelines reflect Kenyas continued efforts
towards strengthening its banking environment so that she can achieve its goal under
Vision 2030 to be an international financial stability country (Richard, Devinney,Yip &
Johnson, 2009). However despite introduction of CBK prudential regulations 2006
governing commercial banks in Kenya, there are very few systematic studies that
critically assess how regulations have affected the financial performance of commercial
banks.
Commercial banks propel the entire economy of any nation by transmitting monetary
policy impulses to the economic system. During their operation, the banks face
competition and other challenges that expose them to risks and therefore the need for
bank supervision and regulations. Banking regulation plays a major role in determining
the cost of services of banks such as if interests are unregulated it will create a great
discrepancy from one bank to another. This aims at is for ensuring stability in the
banking industry (Yona & Inanga, 2014).

Banking regulation originates from microeconomic concerns over the ability of bank
creditors (depositors) to monitor the risks originating from the lending side and from
micro and macroeconomic concerns over the stability of the banking system in the case
of a bank crisis. In addition to statutory and administrative regulatory provisions, the
banking sector has been subject to widespread informal regulation, i.e. the
governments use of its discretion, outside formalized legislation, to influence banking
sector outcomes (for example, to bail out insolvent banks, decide on bank mergers or
maintain significant State ownership). Banks are believed to be inherently unstable
because they are structurally fragile. The perceived fragility comes from maintaining
low ratios of cash reserves to assets (fractional reserves) and capital to assets (high
leverage) relative to their high short term debt. This appears to be the case in most of
countries in the world (Benston and Kaufman, 1996).
The financial crisis has forced governments around world to focus on financial stability
of a country (Fuchs, Losse-Mueller &Witte, 2012). Furthermore, there have been an
unprecedented number of disruptive banking crises in recent decades. The recent bank
crisis has created calls for introduction of reforms in bank regulation and supervision.
The appropriate role of bank regulation or whether they should be regulated at all has
been a matter of controversy (Benston and Kaufman, 1996). Shleifer (2010) critical
arguments for the expansion of regulation in the US was based on the premise that
American and European societies are much richer today than they were 100 years ago,
yet they are also highly more regulated.
Since the early 1970s, bankers have developed a host of new financial instruments and
practices. These innovations have altered the nature of banking, and this in turn has
complicated the task of banking regulation. For instance national regulations have
become largely ineffective in monitoring the safety and soundness of global banks. It is
the resulting market changes and the growth of knowledge about the risks facing the
international financial system that have prompted governments to hold multilateral
discussions regarding banking regulation (Kapstein, 1989). The Basel Committee on
Bank Supervision (BCBS), International Monetary Fund and World Bank now promote
an extensive list of best practices to be adopted by each and every country for the
regulation and supervision of their banks. There is a strong sense that if only

policymakers in countries worldwide would implement particular regulatory and

supervisory practices, then bank safety and soundness would improve, thereby
promoting growth and stability (Barth, Caprio & Levine, 2001).
The Basel Committee on Banking Regulation and Supervisory Practices devoted
significant resources and considerable attention to the development of the capital
adequacy framework for internationally active banks. This is known as the 1988 Basel
Accord (Basel I). In 1988, the Committee decided to introduce a capital measurement
system commonly referred to as Basel I. In June 2004 this framework was replaced by a
significantly more complex capital adequacy framework commonly known as Basel II.
Following the financial crisis of 2007-2008, Basel II was replaced by Basel III, which
will be gradually phased in between 2013 and 2019 (Thumbi, 2014). Banks shareholders
have increased pressure on their management to increase banks return on equity
(ROE) ,liquidity and capital costs. In particular, Basel III creates incentives for banks to
improve their operating processes not only to meet requirements but also to increase
efficiency and lower costs (Kombo, 2014).
Maintaining financial stability is a major concern of every countrys central banks have
been mandated to supervise and regulate banks as way ensuring financial stability of a
country. The 2008 global crisis consisted of a financial crisis in the North Atlantic
economies and a trade and expectations crisis in the rest of the world. Five years on, US
and European policymakers are still struggling to put in place regulation and supervision
regimes aimed at avoiding future crisis (Danielsson, James, Valenzuela & Zer, 2014).
Currently attention has been on the role of government in the financial sector, its
participation as owner of financial intermediaries & its role in regulating and supervising
financial intermediaries is not surprising in view of recent events around the world. Yet,
for decades the size, composition and functioning of the financial system were generally
considered to be unimportant for economic development and growth and therefore
usually omitted from standard macroeconomic models and development (Barth, Caprio
& Levine, 1998).
Furthermore, a cross-country comparison conducted by Williamson and Mahar (1998)
concluded that prudential regulation and supervision was stronger in countries

experiencing less severe financial crisis as compared to those experiencing more severe
crisis. Besides, average level of prudential regulation and supervision in the five-year
period preceding a crisis is found not to be independent from the occurrence of a
banking crisis. The financial sector policies adopted by the government in Kenya had
very varied effects on the development of the banking system. However the banking
system in Uganda is among the weakest in Sub-Saharan Africa. The financial policies of
the pre-reform period aimed to control banking markets, ostensibly for developmental
and other non-commercial objectives. Government intervention took the form of
establishing publicly owned commercial banks, imposing direct controls over interest
rates and some components of the asset portfolios of financial institutions (FIs) and
bringing informal pressures to bear on government owned FIs to influence lending
decisions (Brownbridge,1996).
In recent years of regulation banking, it has become less pervasive and has shifted from
structural regulation to a more market oriented forms of regulation. The bank regulations
rests on the argument that unregulated private actions create outcomes with social
marginal costs are greater than private marginal costs. The social marginal costs occur as
result of banks failures which have effects throughout the economy for banks make
payments and storage of savings. In contrast, the private marginal costs are borne by the
shareholders and the employees of the firm and these are likely to be smaller than the
social costs. Nevertheless, bank regulation involves real resource costs of a direct nature
plus the compliance costs borne by the regulated banks. Further, a hidden cost of
excessive regulation is a potential loss of innovation dynamism, (Mathews & Thompson,
2008).
Barth, Caprio and Levine (1998) argues that even proponents of laissez-faire admits that
if policy-making positions during a crisis affecting large banks. Banks should not ignore
their own management advice because there is no bank which too big not to fail. This
situation suggests that perhaps one should consider a framework for financial regulation
in which one set of rules would operate during normal times, designed to minimize the
likelihood of a financial crisis and another set of rules would operate during crisis.

Pigous (1938) classic treatment of regulation holds that monopoly power, externalities,
and informational asymmetries create a constructive role finance and growth. Based on
the view of helping hand of government of bank regulation, the strong helping hand of
government helps in poverty eradication and growth improvement by offsetting market
failures and thus enhances social welfare. However everyone does not share this helping
hand view of regulation, but Shleifer and Vishny (1998), for instance, argues that
governments frequently do not implement regulations to ameliorate market failures.
However, governments implement regulations in a grabbing-hand manner that supports
political constituencies (Barth at el, 2001).
Olsons insight stimulated members of the Chicago School, beginning with Stigler, to
explain how regulations acquired by industry are designed and operated primarily for its
benefit (Stigler, 1971). Stigler asserted that there is a market for regulation, just as there
is a market for other goods and services. In Stiglers model, government regulators are
suppliers of regulatory services (exchanging regulatory rents for various forms of
political income or personal gain), while the regulated industry is the primary source of
demand (Williams, 2004). The assumptions that market behavior is normally motivated
by fairly narrow considerations of self-interest is plausible because most market interests
are promoted by regulatory agencies, are frequently influence on the regulatory process
of interest groups.
A substantial literature has shown the causes and consequences of financial
performances especially for most banks during crisis relied on various reforms that
might help prevent future crises. Although the proposed changes are all important
aspects, these changes focus on existing financial regulations and supervisory standards.
The financial crisis in countries ranging from the United States and Japan, to Korea and
Mexico, to Chile and Thailand, to India and Russia, and to Ghana and Hungary have
been blamed at least on part of bad regulation and supervision. The fact that Canada
did not experience a subprime crisis supports the view that the tradeoff between the
scope of regulation and of intermediation can be improved by broader and more efficient
regulation than those that existed in the US prior to 2008. Prior to the crisis, Canada had
integrated regulation of banks, insurance companies and large investment dealers. The
Canadian office of the superintendent of financial institutions regulated banks on a

consolidated basis (retail, commercial & investment and wealth activities) worldwide in
contrast to the US. Canada had a regulatory cap on leverage at an asset-to-capital ratio of
20 to 1 (Vianney, 2013).
Majority studies done on central bank regulatory requirements in commercial banks
have focused on developing countries with a few exceptions from Africa (for example,
Botswana, Namibia, South Africa, Swaziland). However, although past research had
focused on the U.S. banking industry this is not representative. For example, the U.S.
has over 23,000 banking institutions, which is large even compared to Japan (4,635),
Germany (3,509) and France 547). Moreover the U.S. has very developed financial,
legal and regulatory systems, few state-owned banks and strong protection of private
property, but these features do not hold in many countries (Demirguc-Kunt, Laeven &
Levine, 2003).
In Egypt, the central bank is the supervisory authority for deposit-taking banks, with
wide powers vested in it by the banking law. Prior to reforms in the early 1990s, the
banking sector was heavily regulated through credit controls and portfolio restrictions.
The Central Bank of Rwanda in the year 2000 made a major effort to studying banks
performance in Rwanda and agreed that inefficient supervisory action and inadequacy
of regulatory framework were among factors that could have contributed to banking
distress in Rwanda (Vianney, (2013).
Over the years, a considerable literature has shown that there is a relationship between
bank ownership and performance. Two clear messages from that literature are: (i) that
ownership is important; and (ii) that it is helpful to view the issue in the context of the
principal-agent framework and public choice theory. However, whilst that literature has
provided considerable understanding of the effects of ownership, its primary focus is on
non-financial firms. The reasons why different ownership forms may lead to different
efficiency levels have been extensively explored in the literature and the dominant
model of the effect of ownership utilizes the principal agent framework and public
choice theory to highlight the importance of the extent to which management is
constrained by capital market discipline. Agency issues associated with different types of
firm ownership are an area of concern in many banking systems where state-owned

banks operate alongside mutual and private-sector institutions. The German banking
market study has shown that little evidence to suggest that privately owned banks are
more efficient than their mutual and public-sector counterparts (Altunbas, Evans &
Molyneux, 2001).

Lopez-de-Silanes and Shleifer (2000) argued that on average, greater state ownership of
banks tends to be associated with more poorly operating financial systems. These
findings were particularly notable in the wake of the East Asian crisis and the haste with
which many have concluded that all things Asian including close ownership links lead to
crisis. The greater state ownership of many banks tends to be associated with more
poorly developed banks, nonbanks and securities markets. In an independent study using
alternative measures of bank ownership, La Porta Lopez-de-Silanes and Shleifer (2000)
studied the relationship between government ownership and financial development.
They convincingly showed that government ownership retards financial development.
The existing literature has shown that China has been reforming its banking system. She
has been reforming its banking system by partially privatizing and taking on minority
foreign ownership of three of its dominant Big Four state-owned banks. A study
conducted on Bank ownership and efficiency showed that big four banks were by far
the least efficient ,foreign banks are most efficient and minority foreign ownership is
associated with significantly improved efficiency(Altunbas e tal, 2001).

Iannotta,

Nocera & Sironi (2007) argued that public sector banks have poorer loan quality and
higher insolvency risk than other types of banks while mutual banks have better loan
quality and lower asset risk than both private and public sector banks. They concluded
that ownership concentration does not significantly affect a banks profitability; a higher
ownership concentration is associated with better loan quality, lower asset risk and lower
insolvency risk.
Fama (1983) argued that accountability of the managers of mutual to their owners may
be greater than that of the managers of private organizations simply because mutual
claim holders can each independently exercise the right to withdraw funds when faced
with evidence of managerial inefficiency. In turning to the banking industry, it is clear
that not only is the industry highly competitive, but also that in many countries mutual
ownership must be considered alongside that of public and private ownership forms.

Also, there is relatively little guidance from the literature about the relative efficiency of
these three ownership forms of financial firms. Gorton and Rosen (1995) address the
issue of ownership and control for US commercial banks during the 1980s and they find
that owner-mangers tend to take on excessive risks when the banking industry is
performing poorly. Due to above literature, this study was carried to find out the
moderating effects of relationship between CBK regulatory requirement and bank
financial performance in Kenya
1.1.1 History of Central Bank Regulatory Requirements.
The term prudential regulation refers to central bank regulatory requirements that were
first used in 1970s in unpublished documents of Cooke committees (the precursor of
Basel Committees on Banking Supervision) & the banking of England. But only in the
early 2000s after two decade of recurrent financial crisis in banking industry in emerging
markets, prudential approach to regulation and supervisory framework become
increasingly promoted. This was done especially by authorities of bank for international
Settlement. A wider agreement on Central bank regulatory requirements relevance
have been reached as a result of the late 2000s financial crisis( Clement,2010)
The history of U.S. banking regulation is written largely on history of government and
private response to banking panics. Implicitly or explicitly, each regulatory response is
as result of crisis which is presumed to be model origin of banking panics. The founding
father of US central bank strongly opposed to the formation of central banking
system,the fact that England tried to place the colonies under monetary control of bank
of England. This was seen by many as the last straw oppression which led to direct
American Revolution war. The other who was strongly in favor of a central bank was
Robert Morris a superintended of France who helped to open bank of Northern America
In1782. He has been called by Thomas Goddard as the father of system of credit and
paper circulation in the U.S. (Financial Stability Oversight Annual Report, 2003)
In United Kingdom the first UK Act to put banking regulation on a statutory footing was
in1979. Prior to 1977 there was no regulation of the sector. This was around the same
time as EC Directive No 77/780 of 12 Dec 1977(1) intended to promote harmonization
in financial services. This Act introduced the requirement for institutions to be licensed

10

in order to accept deposits from the public. It made no attempt to define a bank or
banking business and its provisions were applicable only to deposit taking institutions.
The 1987 Act increased the BoEs supervisory rule significantly, including the power to
vet shareholders of UK banks. There was an absolute prohibition on the accepting of
deposits by a person in the course of carrying on a deposit-taking business, unless that
person was an authorized institution in the words of the Act as per sec 67(2).
Authorization could be revoked or restricted and the Bank had powers of investigation.
It established a Deposit Protection Scheme, for the protection of customer accounts, into
which the banks paid, which was replaced in 2001 by the Financial Services
Compensation Scheme. It contained provisions for the controlled use of banking names
and descriptions. An authorized institution was required to report to the Bank if it
entered into a transaction relating to any one person as a result it was exposed to the risk
of losses in excess of 10 percent of its capital. Regulation of overseas institutions based
in the UK was also included in the Act (Clement, 2010).
Before US had central bank , banks regulated themselves through established private
clearing housing resembling the private central banks in other countries to provide both
prudential supervision and prevent local decline in the asset assisting that serves as
bank reserve and money (Benston and Kaufman,1996). In the early 70s financial
systems were characterized by important restrictions on market forces which included
controls on the prices or quantities of business conducted by financial institutions,
restrictions on market access and controls on the allocation of finance amongst
alternative borrowers. However in the mid-70s there has been a significant process of
regulatory reform in the financial systems of most countries (Biggar & Heimler, 2005).

Prior to the 1980s, bank supervisors in the United States did not impose specific
numerical capital adequacy standards. Instead, supervisors applied informal and
subjective measures tailored to the circumstances of individual institutions. In assessing
capital adequacy, regulators stressed factors such as managerial capability, loan portfolio
quality and largely downplayed capital ratios. Indeed, it is

widely held that rigid

adherence to fixed capital ratios would preclude the more comprehensive analysis of
thoughts that was necessary to weigh the myriad of factors affecting a bank's ability to
sustain the losses. These statements exemplify a judgment-based, subjective; bank-by-

11

bank approach to assessing capital adequacy. The convergence of macroeconomic

weakness, more bank failures and diminishing bank capital triggered a regulatory
response in 1981 when, for the first time, the federal banking agencies introduced
explicit numerical regulatory capital requirements (Beatty & Liao, 2014).
Over the last thirty years, the mandate of central banks around the world has been
progressively narrowed to the goal of price stability. This convergence was prompted by
the chronic inflation that characterized most advanced economies in the 1970-80s and
independent central banks anchored to an inflation target seemed to be the optimal
institutional arrangement to the problem of inflation. However, the 2008-09 global
financial crisis reopened the debate on central bank design (Alesina and Stella, 2010).
In Kenya the first and most known milestone of CBK regulatory requirements was based
on the Basel Accord of July 1988 which required the major international banks in a
group of 12 countries to attain an 8% ratio between capital and risk-weighted assets
from the beginning of 1992. Subsequently, the increasing range and sophistication of
financial instruments made the limitations of the probably too simple design of the 1988
capital-adequacy framework become apparent. In 1997 the Basel Committee on Banking
Supervision, sought enhance further banking supervision in both G10 countries and a
number of emerging economies and it released a set of Core Principles which set out
minimum requirements for banking (Thumbi, 2014).
In 1966, Kenya formed CBK under the Central Bank of Kenya Act. Since the
amendment of the Central Bank of Kenya Act in April 1997, the Central Bank operations
have been restructured to conform to ongoing economic reforms. There is now greater
monetary autonomy. Section 4 of the Central Bank of Kenya Act states the core mandate
of the bank as follows: the principal object of the Bank shall be to formulate and
implement monetary policy directed to achieving and maintaining stability in the general
level of prices; the Bank shall foster the liquidity, solvency and proper functioning of a
stable market- based financial system; and the Bank shall support the economic policy of
the Government, including its objectives for growth and employment. CBK prudential
regulations 2006 for institutions licensed under the banking act were issued under
Section 33(4) of the Banking Act, which empowers the CBK to issue guidelines to be

12

adhered to by institutions in order to maintain a stable and efficient banking and

financial system. The effective date for implementation of the regulations was 1st
January 2006 (Njeule, 2013).
1.1.2 Effects of Central Bank regulatory requirements and Bank performance.
Most economists have agreed that unregulated system of enterprise tends to achieve
optimal resource. The argument of Dowds defense of panoply of government
intervention into financial sector is that the central government sponsors deposit
insurance. He further argued that government regulation of financial system should be
abolished (Benston and Kaufman, 1996). However the researcher disagrees with Dowds
defense of free or laissez-faire banking (or free banking) but focus instead on how banks
should be regulated to an existing non-laissez-faire structure to achieve best for both
international and local.
Different central bank regulations were applied to commercial banks and NBFIs. For
example, commercial banks were subjected to lower loan rate ceilings, higher liquidity
requirements and limits on private sector credit expansion. They could not levy noninterest fees and service charges that were governed by a variety of liquidity and
prudential requirements and were supervised more closely by central bank. With the
different regulations, the NBFI sector expanded rapidly in the 1980s. Commercial banks
set up NBFIs to circumvent central bank regulation and supervision. However, the low
entry barriers and inadequate supervision of NBFIs rendered many of them
undercapitalized and poorly managed (Ngugi &Kabubo, 1998). However the first,
regulatory interventions and capital injections are associated with less liquidity creation.
Second, these types of interventions also reduce risk taking. These liquidity creation and
risk-taking reduced the effects that recently bailed out institutions in countries such as
Northern Rock in the U.K. and UBS in Switzerland that were considered excessive
liquidity creators. Third, liquidity creation interventions reduced their bank exposure to
credit risk by rebalancing their loan portfolio (Berger, e t al., 2010).
A large literature in central banking has investigated the link between inflation rates and
central bank independence. However, the 2008-09 global financial crisis reopened the
debate on central bank design (Alesina & Stella, 2010). Events that unfolded during this

13

recent crisis have brought attention to the idea that conventional monetary policy aimed
only at price stability in fact may increase financial instability. As a result, a wave of
reforms concerning the involvement of central banks in banking and financial
supervision followed (for example in UK in 2012, Hungary in 2013, Russia in 2013 and
Euro area members in 2014). Central banks are now perceived as public policy
institutions with the goal to promote monetary and financial stability, a double mandate
that might bring a new form of time inconsistency problem (Ueda & Valencia, 2014).
From bank owner perspective, the optimal level of bank capital is decreasing in the
extent of regulatory forbearance. In contrast, from regulators perspective, the optimal
minimum level of required bank capital is increasing in the extent of regulatory
forbearance (Acharya, 2003). Poorly regulated firms are expected to be less profitable,
have more bankruptcy risks, lower valuations and pay out less to their shareholders,
while well-governed firms are expected to have higher profits, less bankruptcy risks,
higher valuations and pay out more cash to their shareholders. On the other hand, it has
been stated that weak regulation in the banking sector not only leads to poor firm
performance and risky financing patterns, but can also provide a conducive ground to
macroeconomic crisis. Other researchers contend that good regulations are important for
increasing investor confidence and market liquidity (Claessens, 2003).
The measures of financial performance as pointed out by Boehlie, Michael, Craig, Alan,
Dawn and Freddie (1999) include profitability, liquidity, solvency, financial efficiency
and repayment capacity. Pandey (2010) defines financial performance as a subjective
measure of how well a firm uses assets from its primary mode of business to generate
revenues. He further says that the term can also be used as a general measure of a firm's
overall financial health position over a given period of time. Pandey also cites return on
asset (ROA) and return on equity (ROE) as the measures of profitability. Financial
performance measures how well a firm is generating value for the owners. Much of the
current bank performance literature describes the objective of financial organizations as
that of earning acceptable returns and minimizing the risks taken to earn this return
(Alam et al., 2011).

14

The prudent economic policies and improved macroeconomic fundamentals result in

low inflation and increased investor confidence which then is translates into consistent
financial performance. Better regulations benefit firms through greater access to
financing, lower cost of capital, better performance and more favorable treatment of
all stakeholders (Mathenge, 2007). The banking environment in Kenya has, for the past
decade, undergone many regulatory and financial reforms (Kamau, 2009).
The Kenyan Vision 2030 advocates for three key pillars of the Kenyan financial sector
which are efficiency, stability and access to financial services. Thus, for Kenya to realize
Vision 2030, the banking sector is a critical element that remains the cornerstone of the
targeted economic growth trajectory (Ndungu, 2010). The CBK issued a new set of CBK
regulatory requirement that came into force on 1stJanuary, 2013. Banks, financial
institutions and mortgage finance companies need to adhere to these prudential
guidelines. The CBK regulatory requirement deal with a wide range of issues including
licensing requirements, corporate governance, capital adequacy requirements, Liquidity
Management, stress testing, foreign exchange exposure limits, prohibited business, antimoney laundering, consumer protection, enforcement of banking laws and regulations,
agent banking and representative offices (Thumbi, 2014). The review has been
necessitated by developments in the national, regional and global arenas and the need to
proactively strengthen the regulatory framework for banks and other institutions licensed
pursuant to the Banking Act.
This study concentrated on CBK regulatory requirements: two (CBK/PG2) to five
(CBK/PG5) only out of 22 in order to establish the effects of CBK regulatory
requirements on commercial bank financial performance (profitability) in Kenya. These
effects were on corporate governance, capital adequacy, risk classification asset and
provisioning and liquidity management. The reason why the study concentrated on CBK
regulatory requirements is because these are based on the CAMEL framework. CAMEL
is a widely used framework for evaluating bank performance. The Central Bank of
Kenya also uses the same to evaluate the performance of commercial banks in Kenya.
Though some alternative bank performance evaluation models have been proposed, the
CAMEL framework is the most widely used model and it is recommended by Basel
Committee on Bank Supervision and IMF.

15

The studies carried out on commercial banks performance and their regulations, are not
unique to U.S. banks.

According to Cornett and Tehranian, (2004) the study on

Portuguese Banking focused on a structural model of competition in the deposits market

looked at the Portuguese banking industry. The study also examined how the removal of
entry barriers in the early 1990s which affected competition in the deposits market. The
results suggested that the Portuguese deposits market was operating under conditions
that were far from perfect competition in the early 1990s. However, following
deregulation progress towards more competition in the deposits market could be clearly
detected.
Epure and Lafuente (2012) study on bank performance in the presence of risk for CostaRican banking industry during 1998-2007 showed that performance improvements
follow regulatory changes. The study further confirmed that appointing CEOs from
outside the bank is associated with significantly higher performance ex post executive
turnover, thus suggesting the potential benefits of new organizational practices. Nasieku
(2014) study revealed that average capital levels of commercial banks in Kenya
remained significantly above statutory minimum. Banks chose to hold capital cushion
for economic benefits but not because of regulatory. Maintaining a specific stand in
credit market, Basel risk sensitive measure of capital does not jeopardize ability of banks
to service the economy. Thus she advocated for looser regulatory policy on minimum
capital requirement as measured by leverage ratio while encouraging banks to hold
capital levels that add value at risk as proposed base II.
In Kenya the CBK Bank statutory minimum liquidity requirement is 20%. However,
according to CBK Bank Supervision Annual Report (2011), the average liquidity ratios
for the sector were 37.0 % in 2008, and this was way above the minimum requirements.
This has baffled many financial analysts as to how banks could withhold such amount
of cash in a credit needy economy such as Kenya (Kamau, 2009). The CBK attributes
this to the banking industrys preference to invest in the less risky government securities,
while Ndungu and Ngugi (2000) as cited by Kamau (2009) attributed this liquidity
problem to the restrictions placed on commercial banks at the discount window, coupled

16

with thin interbank market, a high reserve requirement and preference of government
securities.
According to Benston and Kaufman(1996) large loss by thrift did not occur in US until
after law and regulation that encouraged such institutions to hold long-term fixed
interest mortgages funded by short term government insurance deposit. Credit allocation
regulations support the commercial banks lending to socially important sectors such as
housing, farming, and small business. These regulations may require a commercial bank
to hold a minimum amount of assets in one particular sector of the economy or,
alternatively, to set maximum interest rates, prices, or fees to subsidize certain sectors.
Capital requirements reduce gambling incentives and moral hazard by putting bank
equity at risk. However, they also reduce banks franchise values, thus encouraging
gambling or "betting the bank". It follows that capital requirement regulation is not
enough to yield Pareto-efficient outcomes. The regulatory powers of the central bank
were limited under the Banking Act 1968, while enforcement of banking regulations and
supervision of financial institutions were hindered by lack of staff and adequate
information. It also imposed prudential requirements on the banks and NBFIs including
minimum capital requirements, a liquid asset ratio to be determined by the CBK and
restrictions on excessive loan concentration, lending against inappropriate security and
(by banks but not NBFIs) lending for, or investing in, immovable property or speculative
activities (Ngugi & Kabubo, 1998).
Kamau et al., (2004) used the simultaneous equations approach to model the regulatory
effects of minimum capital requirements on bank risk behavior and capital levels in
Kenya. The study established that the Kenyas banking sector has an oligopolistic
market structure. Chen, Robinson, and Siems examined safety and soundness protection
via minimum capital requirements by looking at the passage of regulations advocating a
mandatory subordinated debt policy especially for large banks. They found out that over
the period of time in which the Gramm-Leach-Bliley Act was passed, a portfolio of
banks with relatively high amounts of subordinated debt experienced positive and
significant wealth effects.

17

Vianney, (2013) argues that effective bank regulation has two main objectives: the first
is to protect private interests of depositors, investors, and creditors; the second is to
safeguard public or collective interest by promoting the integrity and reputation of
financial services markets. Sentero (2013) recommended that central bank should be
keen on commercial banks capital adequacy ratio by laying down financial regulations
on liquidity since the goal of financial regulation is to enable banks to improve liquidity
and solvency. The regulation that is more strict may be good for bank stability, but not
for bank efficiency. Restricting banks may not only lower bank efficiency but also
increase the probability of a banking crisis. The capital structure of banks is highly
regulated. This is because capital plays a crucial role in reducing the number of bank
failures and losses to depositors when a bank fails as highly leveraged firms are likely to
take excessive risk in order to maximize shareholder value at the expense of finance
providers (Kamau, 2009).
1.1.3 Banking Industry in Kenya
One key component to any financial market is the banking system. Banks facilitate
financial development by mobilizing and allocating funds to investment projects with
the greatest long term economic benefits. Moreover, it is widely acknowledged that a
well-structured banking system, defined by its supervisory practices, risk taking, and
governance, promotes greater financial performance and economic stability (Vianney,
2013).
The economic pillar of the Kenya Vision 2030 identifies the banking sector as one of the
six key sectors that are intended to move the economy up the value chain. The strategies
taken by the banking industry should therefore be analyzed in the view of understanding
their contribution to improve the health of the entire financial system in Kenya
(Government of Kenya, 2008). Currently, Kenyas financial system is made up of the
Central Bank commercial Banks, the non-bank financial Institutions, development
finance

companies funded mainly by the government and external development

agencies, a National Social Security Fund, Insurance companies, Pension Funds and the
Nairobi Security Exchange (NSE).

18

Table 1.1: Kenyas Financial System in Comparison to other Financial Systems

Kenya
Uganda
South Africa
Malaysia
Germany

Private credit/GDP*
21.7
13.9
162.4
96.4
102.2

Deposits/GDP*
30.9
26.1
63.3
109.4
103.6

Bank Concentration
45
81
78.9
48.5
74.4

Source: World Bank (2009)

*Ratios given in percentages
The initial development of the banking industry in Kenya commenced before the
formation of the East African currency board in 1919. The first foreign bank to do
business in Kenya was the National bank of India, which in 1896 opened its first branch
at the coastal town of Mombasa. The Standard Bank of South Africa followed in 1910,
and the National bank of South Africa in 1916. The latter two banks merged in 1926
with the Colonial Bank and the Anglo-Egyptian Bank to form the Barclays bank D.C.O
(Dominion, Colonial & Overseas). A majority of banks entered the Kenyan market in
1950s mainly from India and South Africa. This included Bank of Baroda (1953), Habib
Bank (1956) and Ottoman Bank (1958). Commercial bank of Africa came in shortly
after 1962 when its parent bank was constituted in Tanzania. By 1963, Kenyas banking
system consisted of 10 banks that were mainly foreign owned. Soon after the attainment
of Kenyas political independence in 1963, two locally owned banks were established;
the Co-operative bank of Kenya and the National bank of Kenya, both in 1968. With the
onset of financial reforms in 1988, the number of licensed commercial banks was 24; 15
foreign owned, 3 state banks and 6 locally owned private banks. This number increased
and by December 2009, there were 44 commercial banks in Kenya (Central Bank of
Kenya, 2011).
The banking business performed by the NBFIs started in the 1940s. The first hirepurchase company was the Diamond Trust Company (1946), which was established to
serve the Ismaili community in Kenya. Others that came later include: Credit Finance
Corporation (1955), the National Industrial Credit Corporation (1959), United
Dominions Corporation (East Africa) Ltd (1959), and the Housing Finance Company of
Kenya Ltd (1965). The second major category of NBFIs in Kenya was the Building

19

Societies. The first to go into business was Savings and Loan Society. It started its
operations in Kenya in 1949. It was joined by the First Permanent Building Society of
Northern Rhodesia in 1950, the first permanent (East Africa) Ltd in 1961, the East
African building society in 1959, Kentanda mutual building society in 1958, and the
Kenya Building Society in 1965, which was later reconstituted as savings and loan
Kenya Ltd. Equity building society and Family finance building society were both
started in 1984 to satisfy a growing demand for mortgage and small loan services in the
unattractive low-income population of the central region of Kenya. They have now
acquired licenses to operate as fully fledged commercial banks (Oloo, 2011).
According to Kenya Bankers Association, the formation of government owned banks
had the effect of speeding up the provision of affordable banking services to majority of
the population. Seven new African-owned banks and 33 non-bank financial institutions
came up as rivals to Cooperative Bank, the only private indigenous bank (KBA, 2010).
After 1978, a number of the institutions were closed after encountering liquidity
troubles. The Central Bank at that time lacked adequate capacity to regulate the highly
politicized sector. Twelve banks collapsed between 1984 and 1989. This made the
government to pass the Banking Act 1989, which tightened the requirement for the
licensing of new financial institutions. This development led to an increase in the
minimum capital requirement, with the deposit insurance made compulsory for all banks
(CBK, 2013). More banks would go under between 1993 and 1995 despite the new
stringent regulations. In 1998 Bullion Banks, Fortune Finance, Trust Banks, City
finance, Reliance Bank and Prudential Banks were also affected. Some indigenous banks
(Equity and Family) especially those that target low income earners and workers in the
informal sector have become a success. The Equity has realized tremendous growth in
the last five years and has expanded to East African region (CBK, 2013).
1.2 Statement of the Problem
In recent decades, many countries have experienced banking problems requiring major
reforms of the banking systems. The problems are largely due to domestic causes, such
as weak banking supervision and inadequate capital. A key part of bank regulation is to
make sure that firms operating in the industry are prudently managed(Berg, 2010) Thus,

20

examining effects of Central bank regulatory requirements in bank financial

performance in countries is a critical area of inquiry.
Without sound measures of banking policies across countries and over time, researchers
are constrained in assessing which policies work best to promote well-functioning
banking systems and in proposing socially beneficial reforms to banking policies in need
of improvement. This helps in explaining why the study of effect of Central Bank
regulatory requirements in bank financial performance in Kenya was needed. Various
studies carried out on bank regulations across the globe have focused to mitigate the
effects of economic crises and lead the stability of the banking system. Naceur and
Kandil, (2009) studying the effects of capital regulations on the stability and
performance of banks in Egypt for the period 1989-2004 in Egypt.
Despite introduction of CBK prudential regulations 2006 governing commercial banks
in Kenya, there are very few systematic studies that critically assess how regulations
have affected the financial performance of commercial banks. These studies include:
The banking sector regulatory framework in Kenya: Its adequacy in reducing bank
failure Obiero, (2002). Financial regulatory structure reform in Kenya and the perception
of financial intermediaries in Kenya and Njeule (2013) studied the effects of Central
Bank of Kenya Prudential Regulations on financial performance of Commercial Banks
in Kenya.
CBK 2006 regulation spelt out the guidelines and regulations to ensure that there is
prudential management in the banking industry. Some of these guidelines relate to
licensing of new institutions, corporate governance, capital adequacy requirements,
liquidity management, risk classification and asset provisioning, foreign exchange
exposure limits, publication of financial statements among others. Njeule (2013) study
focused on CBK/PG/2 to CBK/PG/6(capital adequacy, liquidity management, risk
classification of assets and provisioning, foreign exchange risk exposure and corporate
governance) the study also analyzed one of the measures of performance referred to as
the ROA. The study concentrated on CBK regulatory requirement two to five (corporate
governance, capital adequacy, risk classification asset and provisioning and liquidity
management) out of 22 in order to establish the effects of central bank regulatory

21

requirements on commercial bank financial performance (ROA and ROE) in Kenya. The
reason for the study to concentrate on this central bank regulatory requirements is that
they are based on the CAMEL framework. CAMEL is a widely used framework for
evaluating bank performance. The Central Bank of Kenya also uses the same to evaluate
the performance of commercial banks in Kenya. Though some alternative bank
performance evaluation models have been proposed, the CAMEL framework is the most
widely used model and is recommended by Basel Committee on Bank Supervision and
IMF also it. In all the studies cited, it was evident that the findings were conflicting with
studies from different regions providing different conclusions. This study therefore
sought to investigate the effects of central bank regulatory requirements on financial
performance of commercial banks in Kenya hence the research gap that the current study
sought to fill. This study was built on the premise that the passage of time and the
numerous and significant changes in the commercial banks operating environment have
led to different operating environment after the central bank regulatory requirements.
1.3 Objectives Of the Study
1.3.1 General Objective
The effects of central bank regulatory requirements on the financial performance of
commercial banks in Kenya.
1.3.2 Specific Objectives
The specific objectives of the study were:
i.

To find out the effects corporate governance on

financial performance of

commercial banks in Kenya

ii.

To establish the effects capital requirement on financial performance of

commercial banks in Kenya.

iii.

To assess the effects credit risk management on financial performance of

commercial banks in Kenya.

iv.

To determine the effects liquidity management on financial performance of

commercial banks in Kenya.

22

v.

To assess the moderating effects of Bank Ownership on the relationship between

the effects of Central Bank Regulatory Requirements on financial performance
of commercial Banks in Kenya.

1.4 Research Hypotheses

This study collected data on the following testable hypotheses and subjected them to
empirical investigation. These hypotheses were stated in a null context as follows:
i.

H01: There is no significant effect between corporate governance and

financial performance of commercial banks in Kenya.

ii.

H02: Capital requirement has no significant effect on the financial

performance of commercial banks in Kenya.

iii.

H03: There is no significant effect between credit risk management and

financial performance of commercial banks in Kenya.

iv.

H04:

Liquidity management has no significant effect on the financial

performance of commercial banks in Kenya.

v.

H05: The Bank ownership has no moderating effect on the relationship

between the effects of central bank regulatory requirements on financial
performance of commercial banks in Kenya

1.5 Justification of the Study.

The study has great contribution to the existing knowledge in the area of finance in
Kenya, by broadening the available knowledge. The study benefits various stakeholders
such as academicians, regulators, Government of Kenya and commercial banks
1.5.1 Academicians
The researchers, students and academicians would use this study as a basis for
discussions on implementation of such regulations in the commercial banking industry
and performance. The study would be a source of reference material for future
researchers on other related topics.

23

1.5.2 Regulators
The investment regulators in the country such as the Capital Markets Authority (CMA),
Kenya Banker Association (KBA) and Central bank of Kenya can use these study
findings to understand the bottom line impact of bank regulatory requirements and in
understanding banks decision on to its customers. The study would provide insights on
the possible approaches that can enhance the sectors growth, performance and
monitoring, and hence guide in regulation and policy formulation. This would therefore
help policy makers of the Banking sector with the development and review of existing
policies to achieve synergy in line with the existing circumstances.
1.5.3 Commercial Banks
Through this research, commercial banks in Kenya as well as the various firms in the
financial services sector would benefit immensely from the findings. The top
management would be informed on how to leverage on these regulatory requirements to
ensure long term financial survival of the banks.
1.6 Scope of the Study
The study concentrated on the effects of central bank regulatory requirements on
financial performance of commercial banks in Kenya. The choice of the banking
industry was because it has been earmarked as a key pillar to the achievement of Kenya
Vision 2030and makes a significant contribution to the gross domestic product (GDP).
The study was limited to corporate governance, capital requirement, credit risk
management and liquidity management and their effects on financial performance of 43
registered commercial banks in Kenya from 2009 to 2013. The period of study was
recent enough to ensure data was readily available and reliable for the study.
1.7 Limitations.
The major constraints that were encountered in this study were restrains and
confidentiality from the respondents to the questionnaire as most banks consider some
information as confidential and hence were not willing to reveal most of it.

To

overcome these limitations, the study used a letter of introduction from the university to
assure the respondents that the information provided was used for academic purpose and
thereby to be treat with confidentiality.

24

CHAPTER TWO

LITERATURE REVIEW
2.0 Introduction
This chapter attempts to gain an in-depth view into what is already known in connection
with the research topic being studied. The chapter is divided into three main parts. The
first part covers the theoretical review on corporate governance, capital requirement
credit risk management and liquidity management. This led to the development of the
conceptual framework that guided this study. The second part deals with the review of
existing literature in accordance with the study variables. The third part deals with
empirical studies carried out in the past and in accordance with the variables presented
in the research model, critique, and summary and research gaps.
2.1 Theoretical Literature Review
There are several theories advanced by different scholars to explain the effects of
central bank regulatory requirements on financial performance of commercial banks in
Kenya. This study was guided by six major theories discussed below.
2.1.1 Public Interest Theory of Bank Regulation
Public interest theory lies with Pigouvian welfare economics, which portrayed the state
as an omnipotent, yet benevolent, maximizer of social welfare that could efficiently
correct market failures (Pigou, 1932). It was first developed by Arthur Cecil Pigou who
holds that regulation is supplied in response to the demand of the public for the
correction of inefficient or inequitable market practices. Regulation is assumed initially
to benefit whole society rather than particular vested interests. The regulatory body is
considered to represent the interest of the society in which it operates rather than the
private interests of the investors. The origins of this approach may be found in the
writings of Bentley (18701957). Bentley argued that groups capture control of
regulatory agencies to advance their interests. He dismissed the idea of public interest as
a fiction that represented only the interests of group ( Hantke-Domas, 2003).

25

Public interest approach is a conventional view of regulation rooted on welfare

economics of Pigous (1932). Samuelson (1947) responded to the deficiencies and
unfitted market by focusing on interest of consumers regulations in response to demand
of relief from inequitable and inefficient market. The main focus of Public interest
approach is public good from which group or some citizen will benefit. Under public
interest approach bank regulation exist for exclusive benefit of depositors and investors.
Public interest theory is usually contrasted with public choice theory that is more cynical
about government behavior and motives and sees regulation as being socially inefficient.
Moreover, Stiger (1972) argued that regulation can be captured by incumbent firms to
protect market from entry to competitors. Critics believe that this will only occur when
the public demands a better allocative efficiency. This "theory" has no verified
predictions or outcomes; therefore it is not viewed as a valid theory, Criticism does not
mean that Public interest theory should be abandoned because it does explain well about
bank regulation. Pigous, (1938) classic treatment of regulation argues where market is
imperfect, Adam smith invisible hand will not work. In addition He further argued that
monopoly power, externalities, and informational asymmetries create a constructive role
for finance and growth, and the strong helping hand of government to help offset market
failures and thus enhance social welfare.
The growth of regulation in 1930s was simply a functional response to the changing
public needs and interests of an evolving industrial society. Despite its romantic appeal,
the public interest theory has been theoretically and practically discredited for its
inability to take into account competing conceptions of the public good, its ascription of
heroic and unrealistic attributes to regulators, its underestimation of the power of
organized interests, and its failure to explain why regulation often fails to deliver public
interest outcomes (Baldwin & Cave, 1999). The public interest theory of regulation also
holds that firms require regulations in order to guarantee the choice theory of regulation,
which rests on the premise that all individuals, including public servants, are driven by
self-interest (Hantke-Domas, 2003). The above theory instigated the general objective of
the study on the effects of central bank regulatory requirements on financial performance
of commercial banks in Kenya.

26

2.1.2 Self Interest theory of regulation

As response to criticism of Public interest theory of regulation, are ideologies evolve
focusing on pursuit of private interest. The main

thrust of Self Interest theory of

regulation was propose by stigler and Peltzman is regulation developed as result of

demand from different interest groups for government intervention .There no divergence
between politician and optimal policies( as interest to group demands) and their
implementation. Agency problem arise between politician and regulators because
regulators are intrusively unobservable (Spiller, 1990). The Self Interest theory of
regulation (theory of regulatory) capture provides much more accurate predictions about
recent regulatory experience. It contends that regulatory developments are driven not by
the pursuit of public interest but rather by private interests that lobby for special
privileges or regulatory rents (Williams, 2004). This interest group theory of regulation,
however, owes more to the work of Mancur Olson than it does to the interest group
pluralism of Truman (1951) and Dahl (1961).
In the Logic of Collective Action (1965) Olson posited that since group interests are
collective goods, only small, privileged groups, or those groups with access to selective
incentives, could overcome collective action problems in realizing group goals. Olson
predicted the masses of consumers, taxpayers, the poor, and the unemployed would
remain latent, while privileged groups such as industry cartels, professional associations,
and unions, would organize to further their interests (1965: 49). Olsons insight
stimulated members of the Chicago School, beginning with Stigler, to explain how
regulations is acquired by the industry and is designed and operated primarily for its
benefit (Stigler 1971: 3). Stigler asserted that there is a market for regulation, just as
there is for other goods and services. In Stiglers model, government regulators are
suppliers of regulatory services (exchanging regulatory rents for various forms of
political income or personal gain), while the regulated industry is the primary source of
demand (Williams, 2004). The assumption that market behavior is normally motivated
by fairly narrow considerations of selfinterest is plausible because most market that
the interests promoted by regulatory agencies, are frequently influence on the regulatory
process of interest groups

27

2.1.3 Financial Intermediaries Theory

The Financial intermediarys theory is built on the economics of imperfect information
that began to emerge during the 1970s with the seminal contributions of Akerlof (1970),
Spence,(1973) , Rothschild & Stiglitz (1976). Financial intermediaries exist because
they can reduce information and transaction costs that arise from an information
asymmetry between borrowers and lenders. Financial intermediaries thus assist the
efficient functioning of markets and any factors that affect the amount of credit
channeled through financial intermediaries can have significant macroeconomic effects.
There exist two strands in the literature, which formally explain the existence of
financial intermediaries. The first strand emphasizes on financial intermediaries
provision of liquidity. The second strand focuses on financial intermediaries ability to
transform the risk characteristics of assets. In both cases, financial intermediation can
reduce the cost of channeling funds between borrowers and lenders, leading to a more
efficient allocation of resources.
Diamond and Dybvig (1983) analyzed the provision of liquidity (the transformation of
illiquid assets into liquid liabilities) by banks. The optimal insurance contract in
Diamond and Dybvigs model was a demand deposit contract, but it has an undesirable
equilibrium (bank run), in which all depositors panic and withdraw immediately,
including those who would prefer to leave their deposits in the bank if they were not
concerned about the bank failing. Bank runs cause real economic problems because even
healthy banks can fail, leading to a recall of loans and the termination of productive
investment. Diamond and Dybvig (1983) argued that the illiquidity of assets provides
both the rationale for the existence of banks and for their vulnerability to runs. The
vulnerability to bank runs in the Diamond and Dybvig (1983) model has stimulated a
lengthy debate in the literature on prudential regulation.
When normal volumes of withdrawals are known and not stochastic, suspension of
convertibility of deposits will allow banks both to prevent bank runs and to provide
optimal risk sharing by converting illiquid assets into liquid liabilities. Under the
assumption that banks cannot select the risk of their loan portfolios, a central bank as a
lender of last resort could provide a service similar to deposit insurance. However, when
there is a trade-off between optimal risk and proper incentives for portfolio choice, the

28

lender of last resort can no longer be as credible as deposit insurance. If the lender of last
resort were always required to bail out banks with liquidity problems, there would be
perverse incentives for banks to take on risk. Deposit insurance on the other hand is a
binding commitment that, in theory, can be structured to retain punishment in the case of
bank runs, according to Demirgu-Kunt and Kane (2002) cited by Karas, Pyle &
Schoors ,(2013).
Financial intermediaries are able to transform the risk characteristics of assets because
they can overcome a market failure and resolve an information asymmetry problem.
Information asymmetry in credit markets arises because borrowers generally know more
about their investment projects than lenders do. Financial intermediaries are then more
likely to be lending to high-risk borrowers, because those who are willing to pay high
interest rates will, on average, be worse risks. The information asymmetry problem
occurs ex-post when only borrowers, but not lenders, can observe actual returns after
project completion. This leads to a moral hazard problem. Moral hazard arises when a
borrower engages in activities that reduce the likelihood of a loan being repaid. An
example of moral hazard is when firms owners siphon off funds (legally or illegally)
to themselves or to associates, for example, through loss-making contracts signed with
associated firms. The problem with imperfect information is that information is a public
good. If costly privately-produced information can subsequently be used at less cost by
other agents, there will be inadequate motivation to invest in the publicly optimal
quantity of information (Hirschleifer & Riley, 1979).
Diamond (1984) argues that diversification within the financial intermediary is the main
reason financial intermediaries exist. He also develops a model, in which the outcome
from firms investment project is not known ex-post to external agents, unless
information is gathered to assess the outcome, i.e. there is costly state verification
(Townsend, 1979). This leads to a moral hazard problem because it provides an
incentive for borrowers to default on a loan even when the project is successful. The
above theory instigated the first specific objective of the study on the effects of corporate
governance on financial performance of commercial banks in Kenya.

29

2.1.4 Theory of Liquidity and Regulation of Financial Intermediation

The Theory of Liquidity and Regulation of Financial Intermediation was formulated by
Farhi, Golosov and Tsyvinski (2009). The theory postulates that there are two
informational frictions: agents receive unobservable shocks and can participate in
markets by engaging in trades unobservable to intermediaries. Without regulations,
intermediaries provide no risk sharing because of an externality arising from arbitrage
opportunities.

With regulations, intermediaries provide risk sharing because of an

externality arising from arbitrage opportunities.

Farhi et al., (2009) identified a simple regulation a liquidity requirement that corrects
such an externality by the interest rate on the markets. They showed that whether
markets under provide or over provide liquidity and whether liquidity cap or liquidity or
should be used depends on the nature of the shocks that agents experience. Moreover,
they proved that the optimal liquidity adequacy requirement implements a constrained
client allocation subject to unobservable types and trades. They provide closed form
solutions for the optimal liquidity requirement and welfare gains of imposing such
requirements for two important special cases. In contrast with the existing literature, the
necessity of regulation does not depend on exogenous incompleteness of markets for
aggregate shock. It is difficult for an individual financial intermediary to preclude an
agent to enter in additional risk sharing contracts with other intermediaries. Possibility of
hidden trades can significantly worsen and even eliminate risk sharing.
Allen and Gale (2004) then conclude that, in the absence of aggregate shocks and
incompleteness of the markets for aggregate risk, there is no regulation that can improve
upon the market equilibrium. In contrast to the literature, Farhi et al, (2009) proposed
that imposing a liquidity requirement on the minimal (liquidity cap) or the maximal
(liquidity cap) amount of liquidity holdings of the short asset for an intermediary. They
identify a reason for the market failure and externality in which intermediaries do not
internalize how liquidity they provide aspects other intermediaries via the possibility of
trades on private markets. Importantly, this externality exists even when there are no
aggregate shocks. This contrasts with the conclusions of Holmstrom and Tirole (1998)
and Allen and Gale (2004) that the government has a role in regulating liquidity only if
there are aggregate shocks. They also provide a closed form solution for the optimal

30

regulation in two cases: for a setup with logarithmic utility and for the environment
studied by Diamond and Dybvig (1983). Their model suggests practical implications for
regulation of financial intermediation. Various types of intermediaries or different
regions in a country, depending on the primary nature of the shocks that the agents
whom they serve experience, should have different forms of liquidity regulations.
The above theory instigated the fourth specific objective of the study on the effects of
liquidity management on financial performance of commercial banks in Kenya.
2.1.5 Capture Theory and Monopoly Control
The public-spirited vision of the public interest theory of regulation began to be
challenged systematically in the early 1970s when researchers suggested that the
individual regulatory agencies of government did not work for the public interest at all.
Instead, they worked for private interests who actually demanded to be regulated as way
of enhancing profits. Going further, some even argued that each individual government
agency was "captured" by the leading organized interest (a company or business
association) in the industry over which a particular agency operated. This view rests on
the understanding that the political actors most interested in the regulation of a particular
industry are the companies in that very industry. Because of this tightly focused interest
orientation among economic actors, it is thought that each regulating agency has been
isolated and essentially taken over by a single powerful interest or interest association
representing the very industry under regulation.
Furthermore, it is believed that powerful interests in one industry generally do not
interfere with the regulating activities in other industries. This line of analysis implies
that there is little or even no competition over control of public policy among economic
interests. Within each industry a single company or industry association dominates, and
each industry minds its own business being careful not to interfere with other industries
and their particular public agencies. Citizens, meanwhile, are thought to be largely
absent from the processes of economic regulation. This exclusion of citizens is thought
to result from two things: the issues and processes involved are complex and arcane, and
the impact of regulation on any individual citizen is relatively light compared to the
impact on the businesses under regulation. A citizen paying a few dollars more per
month for electricity is relatively insignificant compared to the millions of dollars at

31

stake for an electric utility company. In short, regulation exists not because citizens need
it, but because the regulated industry wants it. The capture theory of economic
regulation provides some of the theoretical foundation for the concept of "iron triangles"
(also known as policy sub-governments), which depict a three-way relationship between
a government agency, the industry over which it has responsibility and the relevant
legislative committees (Stigler, 1971).
2.16 Liquidity Preference Theory
The third theory that guided the study was liquidity preference theory proposed by
United Kingdom economist John Maynard Keynes. Keynes observed that all factors
held constant, people prefer to hold cash (liquidity) rather than any other form of assets
and they will demand a premium for investing in illiquid assets such as bonds, stocks
and real estates. The theory continues to contend that the compensation demanded for
parting with liquidity increases as the period of getting liquidity back increases.
Liquidity preference theory continue to dominate the central concepts in economic and
finance in its application on the theory of demand for money. With regards to Keynes
theory, central banks set the rate of interest in order to control the price of assets through
the demand for money. On emphasis on why people will at all times prefer holding cash,
The economist explained these to the existence of three motives: the motive to keep cash
for daily transactional need, the motive to keep cash for precautionary tendencies and
finally the speculative motive so as to take advantage of opportunities (Bibow, 1995).
The analogy of Keynes theory is imperative on the assets and liabilities functions of a
commercial bank. The theory explains why banks will undertake to compensate for
liabilities and provides essence of why banks will seek compensation for their assets.
This compensation describes the interest rate factor that is a risk factor affecting credit
risk in commercial banks. Therefore, banks will charge higher interest rates where
possibility of default is higher hence liquidity preference theory The above theory
instigated the second objective of the study on the effects of capital requirement on
financial performance of commercial banks in Kenya.

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2.2 Empirical Literature Review

There have been debates and controversies on the effects of CBK regulatory requirement
on banks financial performance below are empirical review of independent and
dependent variables.
2.2.1Corporate Governance
Corporate governance broadly refers to the mechanisms, processes and relations by
which corporations are controlled and directed. Governance structures and principles
identify the distribution of rights and responsibilities among different participants in the
corporation (such as the board of directors, managers, shareholders, creditors, auditors,
regulators, and other stakeholders) and includes the rules and procedures for making
decisions in corporate affairs, (Arcot, Bruno & Antoine, 2005).
Empirical studies have shown that bank efficiency is best explained using the
intermediation approach. This is largely because balance sheet and income account data
are more readily available than what would be required for the production approach.
Efficiency in intermediation of funds from savers to borrowers enables allocation of
resources to their most productive sectors. An efficient banking system reflects a sound
intermediation process and hence the banks due contribution to economic growth
(Aikeli, 2008).
Corporate governance plays a big role in determining the future of the bank. The
management has an overview of a banks operations, manages the quality of loans and
has to ensure that the bank is profitable. The performance of management capacity is
usually qualitative and understood through the subjective evaluation of management
systems, organization culture, control mechanisms. However, the capacity of the
management of a bank can also be gauged with the help of certain ratios of off-site
evaluation of a bank in the capacity of the management to deploy its resources
aggressively to maximize the income, utilize the facilities in the bank productively and
reduce costs (BIS, 2013).
Kamau (2009) affirms that foreign banks are more efficient than local banks. The author
attributed this to the fact that foreign banks concentrate mainly in different operational

33

modalities from the local, which affects the efficiency and profitability. According to
Sangmi and Nazir (2010) management efficiency can be evaluated with reference to
expenditure to income ratio, credit to deposit ratio, Asset utilization ratio, diversification
ratio, earnings per employee ratio and expenditure per employee ratio. Kamau (2009)
investigated the intermediation efficiency and productivity on banks in the period after
liberalization of banking sector in Kenya, using non-parametric measures. Kamau made
use of non-parametric approach (DEA) to measure the efficiency and productivity in the
intermediation process of the banking sector in Kenya. Using data from 40 banks over a
period of thirteen years (1997-2009) the results indicate the general average efficiency
performance of the commercial banks in Kenya under the study period has been 47
percent, 56% and 84% for the technical efficiency under the constant returns to scale, the
variable returns to scale and scale efficiency respectively. Finally the findings also
indicate that banks in Kenya have excess liquidity despite the need for credit in the
economy which at an average of 40 percent is 20 percent higher than the minimum
statutory requirement.
Management Efficiency/ Corporate Governance are one of the key internal factors that
determine the bank profitability but appear to be one of the complexes subject to capture
with financial ratios (Ongore, 2013). However, different authors try to use financial
ratios of the financial statements to act as a proxy for management efficiency. One of
these ratios used to measure management quality is operating profit to income ratio
(Sufian and Razali (2008); Sangmi and Nazir, 2010). However, some used the ratio of
costs to total assets (Nassreddine, 2013). In whatever way the argument goes that
measuring the management efficiency requires to get deep into evaluation of the
management systems, organizational discipline, control systems, quality of staff, and
others.
Sentero (2013) studied the effects of capital adequacy requirements on the efficiency of
commercial banks in Kenya. The study used a descriptive research design. The target
population of the study, consisted of all 43 commercial banks operating in Kenya and
had been in existence in the last five years, licensed and registered under the Banking
Act Cap. 488. To measure economic efficiency the study adopted the Data Envelopment
Analysis (DEA) techniques. The value of the F statistic indicated that the overall

34

regression model was significant implying that there is a significant relationship between
the predictor variables of capital adequacy ratio and the efficiency of commercial banks
in Kenya.
Nasieku (2014) studied how Basel capital adequacy framework has affected economic
efficiency and behavior of banking sector in Kenya. The study adopted non-parametric
approach, Data envelopment Analysis (DEA) to analyze bank economic efficiency and
Malmquist index (MPI) to measure growth of banks in Kenya during 2001-2011 period
of analysis. She found that the behavior of banking sector in Kenya in terms resource
allocation and utilization (efficiency) was affected by level of capital held by bank and
the counties economic situation. The author further found that average capital levels of
commercial banks in Kenya remained significantly above statutory minimum. On
maintaining a specific stand in credit market the study found that, Basel risk sensitive
measure of capital does not jeopardize ability of banks to service the economy. The
author concluded that banks choose to hold capital cushion for economic benefits but not
because of regulatory. The author finally advocated for several issues; 1) looser
regulatory policy on minimum capital requirement as measured by leverage ratio while
encouraging the banks to hold capital levels that would add value to risk as proposed
Base II, 2) Pillar 1 on risk capital and market discipline but caution on pillar 2 on
increased supervisory power and bank regulation and, 3) all banks should increase their
scale of operation so as to minimize the gap between their economic capital and actual
capital they hold for these Kenyan banks sector to be fully efficient.
Aikaeli, (2008) carried on a study on commercial banks efficiency in Bank of Tanzania
Monetary and financial Affairs department. Aikaeli utilized secondary time series data of
the Tanzanian banking sector, applies the Data Envelopment Analysis (DEA) model to
investigate efficiency of commercial banks in Tanzania. The study examined three
aspects of efficiency, which include, scale, scope and x- efficiency of banks. Findings
indicated that banks in Tanzania were generally operating at the decreasing part of their
average cost curve, which later changed in early 2004 to the rising part of their average
cost curve due to stiff competition.

35

Similar to Aikeli (2008), Kamau (2009) finds that Kenyan banks hold excess liquidity
which when regressed against x-inefficiency index is also found to have a positive
significant relationship confirming the hypothesis that that accumulation of excess
liquidity in banks precipitates inefficiency.
2.2.2 Capital Requirement
Capital definition depends on the context in which it is used. In general, it refers to
financial resources available for use. The argument that Companies and societies with
more capital are better off than those with less capital itself does not exist. The
performance depends on production efficiency Companies and societies. Therefore, to
create wealth, capital must be combined with labor, the work of individuals who
exchange their time and skills for money. When people invest in capital by foregoing
current consumption, they can enjoy greater future prosperity. Individuals or companies
can claim ownership to their capital and use. They can also transfer ownership of their
capital to another individual or corporation and keep the sale proceeds. Government
regulations limit how capital can be used and diminish its value; the tradeoff is supposed
to be some benefit to society. The capital structure of banks is highly regulated. This is
because capital plays a crucial role in reducing the number of bank failures and losses to
the stakeholders. According to Hardy & Bonaccorsi di Patti (2001) and Nwankwo,
(1991) capital adequacy is a widely acknowledged key factor in bank performance
measurement and evaluation. It is the first of the five CAMEL factors recognized and
adopted by the Basel system of bank performance assessment of the Bank for
International Settlement (BIS). The used capital adequacy ratio was adopted in the
Nigeria banking system in 1990 as stipulated by the bank monitoring and supervising
authority which is the Central Bank of Nigeria (CBN).
Beckmann (2007) argue that high capital lead to low profits since banks with a high
capital ratio are risk-averse, they ignore potential (risky) investment opportunities and as
a result, investors demand a lower return on their capital in exchange for lower risk. The
regulation that exists in most countries is capital requirement. Capital adequacy
requirements can take a variety of forms. Most countries know their minimum level of
required capital. Therefore, many countries require the maintenance of some capital- or
solvency- ratio; that is, a minimum ratio between capital and an overall balance sheet

36

magnitude, such as total assets or liability, or some weighted measure of risk assets. The
Basel Accord was modified in 2004 introducing more sophisticated ways of computing
capital requirements and increasing the focus on risk-management policies and systems
in banks. In particular the new regulation, which will start to be implementation from the
end of 2006, encourages banks to develop, with supervisory oversight, their own
systems to compute minimum capital requirements (Biggar, & Heimler, 2005).
Acharya (2003) noted that minimum capital requirements are an ex ante mechanism to
prevent bank failures and closure policies are an ex post mechanism to manage the cost
of bank failures. He showed that from bank owners perspective, the optimal level of
bank capital decreases in the extent of regulatory forbearance. In contrast, from
regulators perspective, the optimal minimum level of required bank capital is increasing
in the extent of regulatory forbearance. Capital requirement regulations represent a
mainstay of banking sector policies around the world. Many rules and policies determine
the precise amount and nature of capital that banks must hold. In terms of the amount of
capital, this is typically characterized in terms of the ratio of capital to total banks assets.
In terms of the nature of capital, there are policies concerning the definition of capital
beyond cash or government securities, the definition and valuation of bank assets, and
whether the regulatory and supervisory authorities verify the sources of capital (Barth,
Caprio & Levine, 2013)
Chen, Robinson, and Siems (The Wealth Effects from a Subordinated Debt Policy:
Evidence from Passage of the Gramm-Leach-Bliley Act) examined safety and soundness
protection via minimum capital requirements by looking at the passage of regulations
advocating a mandatory subordinated debt policy especially for large banks. They find
that over the period of time in which the Gramm-Leach-Bliley Act was passed, a
portfolio of banks with relatively high amounts of subordinated debt experienced
positive and significant wealth effects. Portfolios made up of all banks, and those with
no subordinated debt, however, experienced statistically insignificant wealth effects. The
results suggested that policymakers should indeed consider the use of subordinated debt
as a way to enhance market discipline and thus the safety and soundness of commercial
banks.

37

Bris and Cantale (2004) suggested that bank capital regulation should allow different
banks to hold different capital levels based on characteristics such as separation of
ownership and control, which lead to underinvestment and lower risk taking due to
managers self-interests. Gorton and Rosen (1995), in contrast, argue that the risk
-avoiding behavior of managers stressed in the corporate finance literature presumes that
conservative behavior is sufficient for job and perquisite preservation. When bad
managers predominate, conservative behavior may not allow most managers to keep
their jobs and perquisites. These managers may find it optimal to take excessively risky
actions.
Gudmundsson, Ngoka-Kisinguh and Odongo (2013) study sought to find out the role of
capital requirements on bank competition and stability in Kenya for 36 commercial
banks in the period 2000-2011. The study adopted the Lerner index and the Panzar and
Rosse H-statistic to measure competition in Kenyas banking industry. Approximations
of both the Lerner index and the H-statistic showed that competition in the Kenyan
banking sector had reduced over the study period. The study approximated the fixed
effects of capital requirements on bank competition and stability for using a panel
regression model. The log of core capital was positive and significant while squared log
of core capital was negative and significant which is an implication that an increase in
core capital reduces competition up to a point and then increases competition. Return on
equity showed a positive relationship in support of the evidence that capital regulation
improves the performance of banks and financial stability.
Odunga et al.,(2013) examined the effects of liquidity and capital adequacy on the
operating efficiency of 40 commercial banks in Kenya for the period 2005-2011. They
found that banks performance is influenced by how a bank moves forward in an effort
to streamline its operational strategies. They added that commercial banks with enough
liquid assets tend to draw more confidence with customers because of the ability to
address short-term financial obligations. It is therefore important for the central bank to
ensure full compliance with the minimum liquidity requirement by commercial banks.
Regardless of such regulatory framework, the major intention of holding capital is to
build the internal strength of the bank to withstand losses during crisis (Dang, 2011).

38

However some authors argue that capital also affects performance via creating liquidity,
hence banks with strong capital position are able to reduce their financing costs, for
example by paying low interest rates on their debt). However, holding high capital level
is not without drawbacks: a higher CAR ratio reduces the ROE due to two mechanisms:
a high ratio indicates a lower risk and the theory of markets to balance advocating a
strong relationship between risk and profitability would lead us to infer a lower
profitability (Diamond and Rajan, 2001). Kamau (2009) asserted that adequate capital
requirements help to lessen the chance that banks will become insolvent if sudden
shocks occur.
2.2.3 Credit Risk Management
According to VanHoose (2007) the theoretical literature yields general agreement about
the immediate effects of capital requirements on bank lending and loan rates and the
longer-term impacts on bank ratios of equity to total or risk-adjusted assets. This
literature produces highly mixed predictions, however, regarding the effects of capital
regulation on asset risk and overall safety and soundness for the banking system as a
whole.
Kithinji (2010) assessed the effect of credit risk management on the profitability of
commercial banks in Kenya. The study collected data on the amount of credit, level of
non-performing loans and profits for the period 2004 to 2008. The findings revealed
that the bulk of the profits of commercial banks are not influenced by the amount of
credit and non-performing loans, therefore suggesting that other variables other than
credit and non-performing

loans impact on profits. Kithinji further captures Kenya

commercial banks risk management in four distinguishable phases as; the conservative
risk management (before 1980s), lenient credit risk management (1980s), stringent
credit risk management (1990s) and customized global credit risk management
standards (year 2000s).
The Institute of Certified Public Accountants of Kenya (ICPAK) adopted the
International Accounting Standards (IAS) in 1998 and many companies started its
implementation in 1999. With respect to the banking institutions, the applicable
accounting standards is IAS 30 and except for a few issues in interpretation relating to

39

provisioning for bad and doubtful debts, there has not been any problem in the
implementation of the standards and most of the banking institutions have implemented.
The objective of liquidity management is to ensure that an institution will be able to
meet in full, all its obligations and commitments as they fall due, thus a bank is required
to hold liquid assets as a tool for prudential business management. The central bank
requires a bank to maintain a statutory minimum of 20% of its deposit liabilities and
liquid assets.
Al-Haschimi (2007) studies the determinants of bank net interest rate margins in 10 SubSaharan Africa (SSA) countries. He finds that credit risk and operating inefficiencies
(which signal market power) explain most of the variation in net interest margins across
the region. Macroeconomic risk has only limited effects on net interest margins in the
study. Liu and Wilson (2010) found out that a deterioration of the credit quality reduces
the ROA and ROE.
In a study of the sensitivity to risk of large domestic banks in the USA, Linbo (2004)
found that profit efficiency is sensitive to credit risk but not to insolvency risk or to the
mix of loan products. Hahm (2004) argues that it is necessary to improve banking
supervision and banks' risk management to ensure successful financial liberalization.
This is based on a study of interest rate and exchange rate exposure of Korean banks
before the 1997 Asia Pacific economic crisis, which found that the performance of
commercial banks was significantly associated with their pre-crisis risk exposure.
Al-Tamimi and Al-Mazrooei (2007) provide a comparative study of banks' risk
management in locally incorporated banks and foreign banks in the United Arab of
Emirates (UAE). The results showed that the three most important types of risks facing
UAE commercial banks are foreign exchange risk, followed by credit risk and operating
risk. Wagner (2007) established that techniques of Credit risk management reduce the
amount of risks in banks balance sheets giving the new possibilities of diversification
and risk transfer out of the banking sector. The risks reduction can encourage an
excessive risk taking behavior from banks. This can be reduced by banks efforts of
selection and monitoring of risks.

40

Mutesi (2011) investigated the relationship between information, risk management and
financial performance of commercial banks. The author sampled 104 commercial banks
branches from a total of all the branches of commercial banks in Kampala. The study
was guided by the following research objectives, to examine the relationship between
information sharing and risk management, to investigate the relationship between
information sharing, risk management and financial performance. He found that there
was a significant positive relationship between all the study variables information
sharing, risk management, and financial performance. Results from his regression
analysis showed that information sharing and risk management significantly predicted
58.6% of financial performance of commercial banks.
Felix and Claudine, (2008) investigated the relationship between bank performance and
credit risk management. It could be inferred from their findings that return on equity
(ROE) and return on assets (ROA) both measuring profitability were inversely related to
the ratio of non-performing loan to total loan of financial institutions thereby leading to
a decline in profitability. Ahmad and Ariff, (2007) examined the key determinants of
credit risk of commercial banks on emerging economy banking systems compared with
the developed economies. The study found that regulation is important for banking
systems that offer multi-products and services; management quality is critical in the
cases of loan-dominant banks in emerging economies. An increase in loan loss provision
is considered a significant determinant of potential credit risk. The study further
highlighted that credit risk in emerging economy banks is higher than that in developed
economies.
Ogilo (2012) examined the impact of credit risk management on the financial
performance of commercial banks. He further attempted to establish if there exists any
relationship between the credit risk management determinants by use of CAMEL
indicators and financial performance of commercial banks in Kenya. The study used a
causal research design and multiple regression analysis. The study found out that there is
a strong impact between the CAMEL components on the financial performance of
commercial banks. The study also established that capital adequacy, asset quality,
management efficiency and liquidity had weak relationship with financial performance

41

(ROE) whereas earnings had a strong relationship with financial performance. The study
concludes that CAMEL model can be used as a proxy for credit risk management.
Kargi (2011) evaluated the impact of credit risk on the profitability of Nigerian banks.
The author used financial ratios as measures of bank performance and credit risk during
the period 20042008. The study also used descriptive, correlation and regression
techniques. The findings revealed that credit risk management has a significant impact
on the profitability of Nigerian banks. The study concluded that banks profitability is
inversely influenced by the levels of loans and advances, non-performing loans and
deposits thereby exposing them to great risk of illiquidity and distress.
Kolapo, Ayeni & Oke (2012) studied the effect of credit risk on the performance of
commercial banks in Nigeria over the period of 11 years (2000-2010). They used Panel
model analysis to estimate the determinants of the profit function. The results showed
that the effect of credit risk on bank performance which was measured by the Return on
Assets of banks was cross-sectional invariant. The findings revealed that credit risk
management has a significant impact on the profitability of commercial banks in Nigeria
They recommended that banks in Nigeria should enhance their capacity in credit
analysis and loan administration while the regulatory authority should pay more
attention to banks compliance to relevant provisions of the Bank and other Financial
Institutions Act (1999) and prudential guidelines.
Agoraki et al., (2011) used panel data estimation techniques to analyze the interplay
between regulation, competition and bank risk taking behavior in transition countries for
the period 1998-2005. The study defined regulation as capital requirements, restrictions
on banks activities and official supervisory power. The study findings revealed that
banks with lower market power tend to take on lower credit risk and have lower
probability of default. The findings also revealed that capital requirements reduce credit
risk, but this effect weakens for banks with sufficient market power. The study also
investigates whether regulations have an independent effect on bank risk-taking or
whether their effect is channeled through the market power possessed by banks. They
used data from the Central and Eastern European banking sectors over the period 1998
2005. The empirical results suggest that banks with market power tend to take on lower

42

credit risk and have a lower probability of default. Capital requirements reduces risk,
however banks with strong market power significantly weakens or can even be reversed.
Higher activity restrictions in combination with more market power reduce both credit
risk and the risk of default, while official supervisory power has only a direct impact on
bank risk.
Barth et al., (2004) used data on bank regulations and supervision in 107 countries to
assess the relationship between specific regulatory and supervisory practices and
banking-sector development, efficiency, and fragility. The results raise a cautionary flag
regarding government policies that rely excessively on direct government supervision
and regulation of bank activities. The results, suggested that policies that rely on
guidelines that (1) force accurate information disclosure, (2) empower private-sector
corporate control of banks, and (3) foster incentives for private agents to exert corporate
control work best to promote bank development, performance and stability.
Kamau, et al., (2004) used the simultaneous equations approach to model the regulatory
impact of minimum capital requirements on bank risk behavior and capital levels in
Kenya for the period 2000-2002. The study used the Hirschman-Herfindall index (HHI)
and concentration ratio (CR4) to estimate the competitive index. The HHI and CD4
indices confirmed that the Kenyas banking sector has an oligopolistic market structure
or monopolistic competition. Using the three stage least square method, the study
estimated the relationship between capital adequacy ratio and the risk portfolio in the
banking sector. The study findings revealed that risk-based capital requirements have
been effective in increasing capital.
2.2.4 Liquidity Management
Liquidity is simply the ease with which assets of banks can be uncashed in times of
need or its fair value. It is that quality of an asset, which enables a bank to respond to
any financial situation requiring urgent infusion of money. Liquidity is required to meet
regular financial obligations of the bank especially without dipping into its reserves.
When banks hold high liquidity, they do so at the opportunity cost of some investment
which could generate high returns. The trade-offs that generally exist between return and
liquidity risk are demonstrated by observing that a shift from short-term securities to

43

long-term securities or loans raises a banks return but also increases its liquidity risks
and the inverse is true. Thus a high liquidity ratio indicates a less risky and less
profitable banks (BIS, 2013).
Liquidity indicates the ability of the bank to meet its financial obligations in a timely and
effective manner. There are variations among scholars with regard to the measurement
ratios. The most common financial ratios that reflect the liquidity position of a bank
according to Samad (2004) are customer deposit to total asset and total loan to customer
deposits. Other scholars use different financial ratio to measure liquidity. For instance
Ilhomovich (2009) used cash to deposit ratio to measure the liquidity level of banks in
Malaysia. Another important decision that the managers of commercial banks take refers
to the liquidity management and specifically to the measurement of their needs related to
the process of deposits and loans. The importance of liquidity goes beyond the
individual bank as a liquidity shortfall at an individual bank can have systemic
repercussions (CBK, 2009). It is argued that when banks hold high liquidity, they do so
at the opportunity cost of some investment, which could generate high returns (Kamau,
2009).
The CBK requires institutions to maintain minimum cash balances with it as a reserve
against their depositors and other liabilities. Currently the ratio is 10%. These
requirements are legally binding and the central bank may impose a penalty interest
charge on any institutions, which fails to maintain the minimum cash balances. The
banking sector in Kenya looks very competitive judging by the number of local and
foreign banks in the industry. CBK Bank Supervision Report (2014) as of 31 December
2014 there were 44 commercial banks, 13 of which are foreign-owned. However, Beck
and Fuchs (2004) noted that most customers in Kenya below the top tier of corporate
and wealthy borrowers face a non-competitive banking market and are often effectively
tied to one bank, with very high switching costs hence the interest rate spread and
margins in the country.

In Kenya the statutory minimum liquidity requirement is 20%. However, according to

CBK Bank Supervision Annual Report (2009), the average liquidity ratio for the sector

44

was 39.8% in 2009, 37.0 % in 2008, and way above the minimum requirements. This
has baffled many financial analysts as to how banks could withhold such amount of cash
in a credit needy economy such as Kenya (Kamau, 2009). The CBK attributes this to the
banking industrys preference to invest in the less risky government securities, while
Ndungu and Ngugi (2000) as cited by Kamau (2009) attributes this liquidity problem to
the restrictions placed on commercial banks at the discount window, coupled with thin
interbank market, a high reserve requirement and preference of government securities.
Thus given the above foregoing analysis, the Kenyan banking sector provides an
interesting case to assess the effects of liquidity on profitability.
Kamau (2009) argued that when banks hold high liquidity, they do so at the opportunity
cost of some investment, which could generate high returns. The author added that tradeoffs generally exist between returns and liquidity risks that are demonstrated by a shift
from short term securities to long term securities. This shift in securities raises a banks
return thereby increasing banks liquidity risks and the inverse is true. Recent studies
suggest that by combining exposure to liquidity risk in both deposit-taking and lending
yields a risk-reducing synergy
Strahan (2008) cited that Kashyap et al., (2002) argued that as long as liquidity demands
from depositors and borrowers of credit are not too correlated, an intermediary reduces
its cash buffer by serving both customers. Holding cash raises costs for both agency and
tax reasons. Thus, their model yielded a diversification synergy between transactions
deposits and unused loan commitment. Diamond and Dybvig (1983) argued that the
liquid deposit account offered through a financial intermediary nurtures households
insurance against liquidity risk and promotes consumption smoothing. In their model, a
bank is a mechanism to allow investors to finance illiquid with high return projects. This
model does not suggest a true synergy between lending and depositing. Recent studies
have suggested that by combining exposure to liquidity risk in both deposit-taking and
lending yields a risk-reducing synergy.
Odunga et al.,(2013) examined the effects of liquidity and capital adequacy on the
operating efficiency of 40 commercial banks in Kenya for the period 2005-2011. They
found that banks performance is influenced by how a bank moves forward in an effort

45

to streamline its operational strategies. They added that commercial banks with enough
liquid assets tend to draw more confidence with customers because of the ability to
address short-term financial obligations. It is therefore important for the central bank to
ensure full compliance with the minimum liquidity requirement by commercial banks
An empirical study conducted by Loutskina (2005) examined the relationship between
securitization and liquid assets among commercial banks. The author observed that when
faced with a sudden interest rate hike, banks that securitize will utilize internal source of
funding rather than borrow at a high cost in order to maintain their lending activities.
Loutskina study also revealed that banks with more loans that are securitizable are more
liquid and therefore less sensitive to fund shocks that arise from changes in the monetary
policy. For a bank to improve its performance, it must pursue both liquidity and
profitability. Kamau (2009) argued that when banks hold high liquidity, they do so at the
opportunity cost of some investment, which could generate high returns
2.2.5 Bank Ownership and Financial Performance
The relationship between company performance and ownership, if any, emanate from
agency theory. This theory deals with shareholders who are owners of the firm and
managers relationship that are in one way or the other refers to ownership and
performance. According to Ongore, (2011) cited by Ongore and Kusa, (2013) he argues
that the risk-taking behavior and investment orientation of shareholders have great
influence on the decisions of managers in the day-to-day affairs of firms. The concept of
ownership can be defined along two lines of thought: ownership concentration and
ownership mix. The concentration refers to proportion of shares held (largest
shareholding) in the firm by few shareholders and the later defines the identity of the
shareholders (Ongore, 2011).
On the relationship between ownership & bank performance, different scholars came up
with different results. For instance according to Claessens, et al., (2000) domestic banks'
performance is higher compared to their foreign counterparts in developed countries and
the opposite is true in developing countries. Ownership is one of the factors explaining
the performances of banks across the board; yet the level and direction of its effect
remained unresolved. There are scholars who claimed that foreign firms perform better

46

with high profit margins and low costs compared to domestic owned banks. This is so
because foreign owned firms are believed to have experienced management expertise in
other countries over years. Moreover, foreign banks often customize and apply their
operation systems found effective at their home countries (Ongore, 2011).
Claessens and Jansen (2000) as cited by Kamau, (2009) argued that foreign banks
usually bring with them better know-how and technical capacity, which then spills over
to the rest of the banking system. They impose competitive pressure on domestic banks,
thus increasing efficiency of financial intermediation and they provide more stability to
the financial system because they are able to draw on liquidity resources from their
parents banks and provide access to international markets.
Kamau (2009) used a sample of 40 banks in Kenya from1997-2006 and used linear
regression method to analyze factors that influences efficiency and Productivity of the
banking sector in Kenya. The results showed that foreign-owned banks influence the
performance of the local banking sector. The author claimed that foreign banks generally
bring with them superior expertise and technical capacity. Foreign banks impose
competitive pressure on domestic banks. They receive liquidity resources from their
parents banks because of their access to international markets.
Beck and Fuchs, (2004) argued that foreign-owned banks are more profitable than their
domestic counterparts in developing countries and less profitable than domestic banks in
industrial countries, perhaps due to benefits derived from tax breaks, technological
efficiencies and other preferential treatments. However, domestic banks are likely to
gain from the information advantage they have about the local market compared to
foreign banks. This study classifies bank ownership into foreign, both foreign &
domestic and domestic. Foreign banks are an important source of financial vulnerability.
This is because they might start to withdraw funds in order to offset losses in the home
country and increase the chances of collapse of their domestic-based subsidiaries. On the
other hand, cross-country comparisons show that foreign banks may have better
capitalization, improved expertise and technical capacity, which then spill over to the
rest of the banking system (Mwega, 2009).

47

Evidence across many countries indicates that foreign banks are on average less efficient
than domestic banks. A more recent cross border empirical analysis of France, Germany,
Spain, the UK and the U.S. found that domestic banks have both higher cost efficiency
and profit efficiency than foreign banks (Berger et.al, 2000). Claessens, et al., (2000) as
cited by Kiruri, (2013) who reported that in many developing countries (for example
Egypt, Indonesia, Argentina and Venezuela), foreign banks in fact report significantly
higher net interest margins than domestic banks. In Asia and Latin America, foreign
banks achieve significantly higher net profitability than domestic banks. There have
been different lines of thought put forward for the low performance of foreign banks
compared with domestic banks in developed countries. These include different markets,
competitive and regulatory conditions between developed and developing countries.
Domestic banks and U.S. banks are foreign have been relatively less profitable because
they valued growth above profitability (DeYoung & Nolle, 1996).
A study conducted by Kiruri, (2013) on effects of ownership structure on bank
profitability in Kenya on 43 licensed commercial banks over the period 2007 to 2011.
Using simple linear regression, the study found that ownership concentration and state
ownership had negative and significant effects on bank profitability while foreign
ownership and domestic ownership had positive and significant effects on bank
profitability. The study concludes that higher ownership concentration and state
ownership lead to lower profitability in commercial banks while higher foreign and
domestic ownership lead to higher profitability in commercial banks.
Micco, Panizza, & Yanez, (2004) carried empirical study on bank ownership and
performance. The study uses a new dataset to reassess the relationship between bank
ownership and bank performance, providing separate estimations for developing and
industrial countries. It finds that state-owned banks located in developing countries tend
to have lower profitability and higher costs than their private counterparts, and that the
opposite is true for foreign-owned banks. The paper finds no strong correlation between
ownership and performance for banks located in industrial countries. Next, in order to
test whether the differential in performance between public and private banks is driven
by political considerations, the paper checks whether this differential widens during
election years; it finds strong support for this hypothesis.

48

Iannotta, Nocera and Sironi (2007) study evaluated the impact of alternative ownership
models, together with the degree of ownership concentration, on their profitability, cost
efficiency and risk by comparing the performance and risk of a sample of 181 large
banks from 15 European countries over the 1999 to 2004 period. The study found out
that after controlling the bank characteristics, country and time effects, mutual banks and
government-owned banks exhibited low profit than privately owned banks, in spite of
their low costs. Second, public sector banks had poor loan quality and higher insolvency
risk than other types of banks while mutual banks have better loan quality and low asset
risk than both private and public sector banks. Finally, while ownership concentration
does not significantly affect a banks profitability, ownership concentration is associated
with better loan quality, lower asset risk and lower insolvency risk.
Altunbas, et al (2001) carried out a study on the bank ownership and efficiency. The
study used a variety of approaches to model cost and profit inefficiencies as well as
technical change for different ownership types in the German banking market. The study
found out little evidence to suggest that privately owned banks are more efficient than
their mutual and public-sector counterparts. While all three bank ownership types benefit
from widespread economies of scale, inefficiency measures indicate that public and
mutual banks have slight cost and profit advantages over their private sector
competitors.
Claessens et al., (2000) argued that foreign banks perform better in developing countries
as compared to when they are in developed countries. Thus, they conclude that domestic
banks perform better in developed countries than when they are in developing countries.
They further emphasized that an increase in the share of foreign banks leads to a lower
profitability of domestic banks in developing countries. Thus, does ownership identity
influence the performance of commercial banks? Studies have shown that bank
performance have likelihood to be affected by internal and external factors
(Athanasoglou et al., 2005; Aburime, 2008). Moreover, the magnitude of the effect can
be influenced by the decision of the management. The management decision, in turn, is
affected by the welfare of the owners, which is determined by their investment
preferences and risk appetites (Ongore, 2011). This implies the moderating role of

49

ownership. This study attempted to examine whether bank ownership significantly

moderate the relationship between effects of CBK regulatory requirement and
commercial banks' financial performance in Kenya or not.
2.2.6 Central Bank Regulatory Requirements and Financial Performance
Central bank lending is widely regarded as a vital part of the public safety net supporting
the stability of the banking system and financial markets more generally. A central bank
that is financially independent and has a sizable portfolio of securities can provide large
amounts of liquidity to institutions on very short notice. Indeed, central bank lending has
been a prominent part of regulatory assistance to troubled financial institutions for a long
time. The Central Bank of Kenya (CBK), like most other central banks around the
world, is entrusted with the responsibility of formulating and implementing monetary
policy directed at achieving and maintaining low inflation as one of its two principal
objectives; the other being to maintain a sound market-based financial system. Central
Bank of Kenya (CBK) was established under the Central Bank Act (CAP 481), 1966.
The Act assigned to the CBK the statutory objectives to assist in the development and
maintenance of a sound monetary and credit, and banking system in Kenya, conducive
to the orderly and balanced economic development of the country and the external
stability of the currency among other functions (Mwega, 2009).
Kenya is currently using most aspects of Basel I, however, it is worth noting that the
CBK has decided to incorporate certain features of Basel III in the Prudential
Guidelines, particularly in relation to capital adequacy. Kenya is not a member of the
Basel Committee on Banking Supervision, but the CBK does adopt and incorporate
Basel standards when possible. The introductions of prudential guidelines reflect
Kenyas continued efforts towards strengthening its banking environment so that she can
achieve its goal under Vision 2030 to be an international financial center. The CBK has
issued a new set of prudential guidelines and risk management guidelines which came
into force on 1st January, 2013. The Prudential Guidelines deal with a wide range of
issues including; licensing requirements, corporate governance, capital adequacy
requirements, Liquidity Management, stress testing, foreign exchange exposure limits,
prohibited business, anti-money laundering, consumer protection, enforcement of
banking laws and regulations, agent banking, and representative offices. The reasons

50

behind these new Prudential Guidelines is best summarized by reference to the circular
issued by the CBK which states that; Pursuant to its mandate of fostering the liquidity,
solvency and proper functioning of a stable market-based financial system, the Central
Bank of Kenya conducted a comprehensive review of the prudential guidelines and risk
management guidelines which is currently in use. The review has been necessitated by
developments in the national, regional and global arenas and the need to proactively
strengthen the regulator (Thumbi, 2014).
Since its establishment in 1966, the CBK has essentially used a monetary-targeting
framework to pursue the inflation objective. During the early years, the CBK relied
mainly on moral suasion. It enlisted the support of banking institutions through regular
meetings with the chief executives of banks to explain the thrust of monetary policy
initiatives. Being the regulator of commercial banks and non-bank financial institutions,
the CBK had some influence in this regard. The persistent failure of monetary policy to
deliver on its inflation objective in the late 1980s and the early 1990s, the CBK effected
significant changes to monetary policy implementation procedures, including the
introduction of new instruments (Mwega, 2009).
Barth, Caprio, and Levine, (2013) studied the bank regulatory and supervisory policies
in 180 countries from 1999 to 2011. They measured data on permissible bank activities,
capital requirements, the powers of official supervisory agencies, information disclosure
requirements, external governance mechanisms, deposit insurance, barriers to entry and
loan provisioning. The dataset also provides information on the organization of
regulatory agencies and the size, structure and performance of banking systems. They
found that developed summary indices of key bank regulatory and supervisory policies
facilitate cross-country comparisons and analysis of changes in banking policies over
time.
Naceur and Kandil, (2009) used bank scope data base for 28 banks for the period 19892004 to analyze the effects of capital regulations on the performance and stability of
banks in Egypt. The study analyzed two measures of performance: cost of
intermediation and banks profitability, measured by return on assets. The findings
showed that as the capital adequacy ratio internalizes the risk for shareholders, banks

51

increase the cost of intermediation, which supports higher return on assets and equity
pointing out the importance of capital regulation to the performance of banks and
financial stability in Egypt. The study recommends the use of structural reforms aimed at
establishing more competition in the banking industry to ensure that performance
indicators are commensurate with the optimal practices of the intermediation function
that guarantees financial stability over time.
Yona and Inanga, 2014 carried out a study on financial sector reforms in bank
regulations and supervision and its impact on service quality of Commercial Banks in
Tanzania. They found that regulations also plays major role in minimizing the entry
barriers and facilitating the market entry. Banking regulations such as the ones in
Tanzania prescribe minimum conditions of entry and exit into banking industry and
provide minimum capital requirements for banks.
Barth, Caprio, and Levine, (2001) carried out a study on bank regulation and supervision
in 107 countries to examine the relationship between bank regulation/supervision and
bank performance and stability. They used (1) assess different broad governmental
approaches to bank regulation and supervision and (2) evaluate the efficacy of specific
regulatory and supervisory policies. More specifically, we first assess two broad and
competing theories of government regulation.
Epure and Lafuente, (2012) examined bank performance in the presence of risk for
Costa-Rican banking industry during 1998-2007. The results showed that performance
improvements follow regulatory changes and that risk explains differences in banks and
non-performing loans which negatively affect efficiency and return on assets while the
capital adequacy ratio has a positive impact on the net interest margin. The study further
confirmed that appointing CEOs from outside the bank is associated with significantly
higher performance ex post executive turnover, thus suggesting the potential benefits of
new organizational practices.
Using bank level data for 80 countries in the 198895 period, Demirg-Kunt and
Huizinga, (1998) analyze how bank characteristics and the overall banking environment
affect both interest rate margins and bank returns. Results suggest that macroeconomic

52

and regulatory conditions have a pronounced impact on margins and profitability.

Stiglitz, (2001) noted that all the arguments that support the application of regulation to
banks are naturally extended to nonbanks. However, the extent and nature of the
regulation may differ markedly between banks and non-banks depending on the role the
latter institutions play in the economy. Some issues involved in prudential regulation of
non-banking institutions are different from the ones applied to banks because for the
former ones, systemic risk, contagion and the potential disruption of the payments
system do not constitute threatening issues. In the case of Micro Finance Institutions
(MFIs), the task involves establishing an appropriate and cost-effective regulation that is
compatible with the objectives of regulation of the financial system as a whole; and that
allows sufficient margin for innovation and flexibility to facilitate the growth of the
industry.
Obiero, (2002) in his study on the adequacy of the banking sector regulatory framework
in reducing bank failure analyzed 39 banks, which failed in Kenya in the period 1984 to
2001. He identified ineffective board and management malpractices as the most
dominant reason for bank failure. Other causes of bank failure include; high incidences
of nonperforming loans, unsecured insider loans, undercapitalization and insolvency,
poor lending practices, run on deposits, persistent violations of the banking act leading
to closure and heavy reliance on parastatal deposits. He further noted that although the
legal provisions of the banking regulatory framework is fairly comprehensive in
coverage and adequate in content to reduce probability of failure, timely intervention by
CBK is important if they are to be effective.
In the Kenyan context, research devoted to bank performance and efficiency has been
growing and can be categorized as having been studied in the context of different
models. Studies utililising Data Envelopment Analysis for instance (Kamau, 2011;
Kamau, 2009) apply the DEA model to measure the productivity and efficiency of
Kenyan Banks. Aikaeli, (2008) also applies the DEA model to analysed commercial
bank performance in Tanzania while (Githinji, 2010; Olweny & Shipho, 2011) use the
CAMEL model to measure performance while utilizing the ROA and ROE as the
independent variables

53

Olweny and Shipho, (2011) adopt the CAMEL model with the exclusion of the Earnings
component which is provided by ROA, since they use it as the independent variable to
measure profitability of banks in Kenya. They in addition include Foreign Ownership
and Market Concentration to the model to cater for market factors. Using data for the
period from 2002 to 2008 they find that all the components have a significant effect on
profitability with Capital Adequacy the most important followed by operational
efficiency, asset quality and Liquidity respectively. However, no effect of the market
factors are found to affect bank performance.
Naceur and Kandil, (2009) used bank scope data base for 28 banks for the period 19892004 to analyze the effects of capital regulations on the performance and stability of
banks in Egypt. The study analyzed two measures of performance: cost of
intermediation and banks profitability, which was measured by return on assets. The
findings showed that as the capital adequacy ratio internalizes the risk for shareholders,
banks increase the cost of intermediation, which supports higher return on assets and
equity pointing out the importance of capital regulation to the performance of banks and
financial stability in Egypt. The study recommends the use of structural reforms aimed at
establishing more competition in the banking industry to ensure that performance
indicators are commensurate with the optimal practices of the intermediation function
that guarantees financial stability over time.
Njeule, (2013) did a comparative study on the effects of CBK prudential regulations of
2006 on the financial performance of commercial banks. The study covered a twelveyear period from 2001 to 2012; six years prior to implementation of the prudential
regulations (2001-2006) and six years after implementation of the prudential regulations
(2007-2010). The study used only secondary quantitative data to determine the effects
of CBK prudential regulations of 2006 on the financial performance of commercial
banks, Evidence from the study indicated that there was great positive variation on the
financial performance of commercial banks due to changes in capital adequacy, liquidity
management, risk classification of assets and provisioning, foreign Exchange risk
Exposure and corporate governance. This was an indication that CBK regulatory
requirements had great positive effects on the financial performance of commercial
banks. The study further found that the adjusted R squared value for the period after
introduction of CBK prudential regulations 2006 was found to be greater than that of the

54

period prior to the regulations an indicator that the regulations greatly influenced the
financial performance of commercial banks. The study recommended the need for CBK
to enhance their regulatory requirements on commercial banks in Kenya, as it was
revealed that Central bank of Kenya regulatory requirements enhance the financial
performance of commercial banks in Kenya.
2.3 Critique of existing literature relevant to the study
Banking regulation also plays major role in determining the cost of services of banks as
interest is likely to be unregulated and hence create a great discrepancy from one bank
to another. Most empirical studies have discussed Central Bank regulatory requirements
on SACCO, bank regulation and bank crisis, individual Central Banks regulatory
requirements effects and bank performance. There are some empirical studies that have
showed that the financial performance for banks involvement in Central Bank regulatory
requirement exists, but there is no clear consensus among the various authors regarding
the central bank regulatory requirement effects. There are many studies that have been
conducted on this area.
Of interest however is how conflicting the results and findings are: for example, Naceur
and Kandil, (2009) carried out a study on effects of capital regulations on the
performance and stability of banks in Egypt. They used bank scope database for 28
banks for the period 1989-2004 to analyze the study analyzed two measures of
performance: cost of intermediation and banks profitability, which was measured by
return on assets. Naceur and Kandil, (2009) found that capital adequacy ratio
internalizes the risk for shareholders, banks increase the cost of intermediation when
they analyze the effects of capital regulations on the performance and stability of banks.
In the Kenyan context, research devoted to bank performance and efficiency has been
growing and can be categorized as having been studied in the context of different
models. Studies utililising Data Envelopment Analysis for instance (Kamau, 2011and
Kamau, 2009) apply the DEA model to measure the productivity and efficiency of
Kenyan Banks. Aikaeli (2008) also applies the DEA model to analysed commercial bank
performance in Tanzania while (Githinji, 2010; Olweny and Shipho, 2011) use the

55

CAMEL model to measure performance while utilizing the ROA and ROE as the
independent variables
Olweny and Shipho, (2011) adopt the CAMEL model with the exclusion of the Earnings
component which is proxied by ROA, since they use it as the independent variable to
measure profitability of banks in Kenya. They in addition include Foreign Ownership
and Market Concentration to the model to cater for market factors. The study used data
for the period from 2002 to 2008. The study focused Capital Adequacy, operational
efficiency, asset quality and Liquidity as components affecting profitability. Barth,
Caprio and Levine, (2001) studied the bank regulation and supervision in 107 countries
to examine the relationship between bank regulation/supervision, bank performance and
stability. They used (1) assess different broad governmental approaches to bank
regulation and supervision and (2) evaluate the efficacy of specific regulatory and
supervisory policies. More specifically, we first assess two broad and competing theories
of government regulation.
Nasieku, (2014) carried a study on how Basel capital adequacy framework affect
economic efficiency and behavior of banking sector in Kenya. The study adopted nonparametric approach, Data envelopment Analysis (DEA) to analyze bank economic
efficiency and Malmquist index (MPI) to measure growth of banks in Kenya during
2001-2011 period of analysis. Nasieku study concentrated on assessing how efficient
resource allocation and utilization, efficiency productivity change, Basel capital
adequacy framework in commercial banks in Kenya influenced their economically
efficient, implementing Basel II risk sensitive measures and bank regulations and
supervision. She further analyzed how banks private monitoring or disclosure
requirement influence the economic efficiency of Kenyan commercial banks.
Obiero, (2002) study focused on the adequacy of the banking sector regulatory
framework. The study focused in reducing bank failure analyzed 39 banks which failed
in Kenya in the period 1984 to 2001. He further noted that although the legal provisions
of the banking regulatory framework is fairly comprehensive in coverage and adequate
in content to reduce probability of failure, timely intervention by CBK is important if
they are to be effective.

56

Njeule, (2013) did a comparative study on the effects of CBK prudential regulations of
2006 on the financial performance of commercial banks. The study covered a twelveyear period from 2001 to 2012; six years prior to implementation of the prudential
regulations (2001-2006) and six years after implementation of the prudential regulations
(2007-2010). This study used only one type data the secondary data to determine the
effects of CBK prudential regulations of 2006 on the financial performance of
commercial banks. The study focused on CBK/PG/2 to CBK/PG/6 (corporate
governance. capital adequacy, risk classification of assets and provisioning, liquidity
management and foreign Exchange risk Exposure). The study analyzed one measures of
performance the ROA.
2.4 Research Gaps and Summary
The chapter has discussed in details the various study variables that include capital
requirement, liquidity management, credit risk management, corporate governance and
bank performance. The study also reviewed the theories relevant to the study. Finally,
the study has also looked into the conceptual framework of the study. This chapter
covered a review of the finance literature regarding the theoretical justifications for
regulating the financial system and the various approaches of undertaking financial
regulations. The theoretical literature supports the regulation of the banking sector and
removal of monopolistic tendencies in the market.
Reviewed theories have revealed that, central bank regulatory requirement can help
banks in avoiding regulatory arbitrage. This is a requirement that any bank should not
take for granted. This is because financial regulation impacts the behavior and
performance of stakeholders in the financial institutions and markets. Therefore
significant financial and economic effects need to be properly analyzed. These
theoretical concepts form an important foundation in analyzing the effects of the central
bank regulatory requirements on the financial performance of commercial banks.
However, various empirical studies reviewed, demonstrated that implementation of the
central bank regulatory standards should not only be country and sector-specific but also
relevant and consistent with the chosen regulatory approach. Based on the above, it

57

shows that there is a gap between theory and evidence in application of central bank
regulatory requirements to help improve financial performance in the banking sector.
In addition, it is evident that research in the area of central bank regulatory requirements
has been done but not in a comprehensive approach. All the literature reviewed indicates
that previous researchers only concentrated on a few variables of CBK regulatory
requirements. This study covered additional important variables that omitted by previous
studies like corporate governance and credit risk management. Empirical evidence in
Kenya showing the effects of CBK regulatory requirement on financial performance of
commercial banks in Kenya is not explicitly researched and related studies are not
explicitly documented, and a gap exists which can be filled through more research on the
area. Thus, there was need to carry out an empirical investigation to establish the extent
to which the CBK regulatory requirement had affected or influenced financial
performance of commercial banks in Kenya. This was the gap the study sought to fill
by focusing on CBK regulatory requirement two to five (corporate governance, capital
adequacy, risk classification asset and provisioning and liquidity management) only out
of 22 in order to establish their effects on commercial bank financial performance
(measuring ROA and ROE) in Kenya.
2.5 Conceptual Framework
Conceptual framework is a detailed description of the phenomenon under study
accompanied by a graphical or visual depiction of the major variables of the study
(Mugenda, 2008). The conceptual framework below shows the relationship between the
dependent and independent variables. The dependent variable in this study is financial
performance, which is represented by the return on asset (ROA) and return on equity
(ROE) which are proxy indicators of banks profitability. The independent variables are
effects CBK regulatory requirement. The moderating variable in this study is ownership
structure represented by the percentage of foreign and local shareholding. The
conceptual framework was developed from the review of literature discussed above and
assumes a linear relationship between the variables.
The dependent variable (banks financial performance) was measured by ROA and ROE.
The ROA are measures of profitability in relation to investment while ROE indicates

58

how well management is utilizing the resources of the shareholders and that the ratio of
net profits to owners' equity reflects the extent to which management has achieved
proper utilization of shareholders resources (Pandey, 2006). The conceptual framework
helped the researcher to see the proposed relationship between the variables easily and
quickly.
Independent Variable

Moderating Variable

Dependent

Variable
CBK regulatory requirements
Corporate Governance

Bank ownership

Management efficiency =Operating

Income / total income)

Foreign
owned
Local owned

Capital requirement
Capital Adequacy=Equity/Total
asset

Financial performance

Credit risk Management

Asset Quality=Non-performing
loans /Total loans

Liquidity Management
Bank liquidity=Total Loans to
Total Customer Deposit

Figure 2.1 Conceptual Frame work

59

Return on Assets
Return on Equity

CHAPTER THREE

METHODOLOGY
3.0 Introduction
This chapter gives a description of the methods and approaches that were adopted in
conducting this study. It includes the research design, the study population, sampling
size procedure, pilot study and data analysis. The type and sources of data expected ,the
methods of data collection and how reliability and validity were tested. The
measurements of variables and data analysis techniques were also discussed.
3.1 Research Philosophy
Research philosophy is important in the development of the research background,
research knowledge and its nature (Saunders, Lewis and Thornhill, 2009). Furthermore
research philosophy can also be described as a paradigm which involves a broad
framework, comprises perception, beliefs and understanding of several theories and
practices that are used to conduct a research.
The fundamental question in any field of study concerns what constitutes acceptable
knowledge in that field. In the process of establishing knowledge on the study, the
researcher was guided by one of the many philosophical viewpoints or philosophies
noted by Flowers (2009) to include: positivism, phenomenology and realism among
others. The two main philosophies that guide social scientist researchers are positivism
and phenomenology.
Positivism is a philosophy of science that seeks facts of social phenomena with little
regard for the subjective status of an individual (Hargrove, 2004). The study adopted the
positivist philosophy which advocates for an objective interpretation of reality using
hard data from surveys that are structured, formal, and have a specific and detailed plan.
This fitted in well with the design of the study which adopted a clear quantitative
approach to investigating the relationships among the study variables objectively and
independent of the influence of the researcher. Predictions were made on the basis of the

60

previously observed and explained realities and their inter-relationships. This approach
enabled the researcher to see the relationship between the effects of CBK regulatory
requirement (corporate governance capital requirement, credit risk management and
liquidity management) and bank performance in Kenya by establishing a causal
relationship. In turn, this enabled the researcher to test the theory in the context of
Kenya.
3.2 Research Design
The study used descriptive research design because the study tried to obtain information
concerning the current status of the CBK regulatory requirement effects as well as
financial performance of commercial. A descriptive research design determines and
reports the way things are (Mugenda & Mugenda, 2003). Descriptive research design
was used in other studies such as the impact of credit risk management on financial
performance of commercial Banks in Kenya by Ogilo (2012); banking survey report by
Oloo (2011) and determinants of financial performance of commercial banks in Kenya
by Ongore and Kusa (2013). In view of the above definitions, descriptions and strengths,
descriptive survey is the most appropriate design for this study
3.3 The Target Population
A population is an entire group of individuals, events or objects having common
characteristics that conform to a given specification (Mugenda &Mugenda, 2003).
Table 3.1: Target population
Bank Category

No. of Banks

Foreign banks
Local banks
Total

31
12
43***

No. of bank
executives
4
4
4

Sample size
124
48
172

*** Charterhouse Bank was under statutory management not included

Source: CBK, 2013
The population for this research comprised of all the commercial banks in Kenya that
have been in existence in the last five years, licensed and registered under the Banking
Act as shown by table 3.1 above.

61

According to the Central Bank of Kenya, there were 44 licensed banks in Kenya as at
31st December 2009. The survey targeted all the 43 commercial banks in Kenya.
However, despite trying to get information from the bank under statutory management
(Charter-House Bank), it was not possible to get any feedback. The target respondents
were head of finance; credit supervision; debt recovery and risk & compliance
department from each of the commercial banks . This resulted into a target population of 176
possible respondents. The main reason for choosing these employees was because they

were responsible for performance of their respective banks and had higher level of
appreciation on how CBK regulation requirement influence financial performance.
3.4 Sampling Technique and Illustrations
3.4.1 Sampling Frame
Nachmias and Nachmias (2008) define a sampling frame as a list of all the items where
a representative sample is drawn for the purpose of a study. The sampling frame for this
study was derived from the list of all the licensed commercial banks and mortgage
finance institutions in operation in Kenya as at 31st December 2013, licensed and
registered under the Banking Act and also as laid out in on appendix IV
3.4.2 Sample and sampling Technique
Given that the target population was 43 commercial banks, a census study was
conducted because the number was not high. According to Mugenda and Mugenda
(2003) when the population is too small, census is the most preferred method. The
researcher first stratified all the banking institutions based on ownership structure. This
stratification of

all the banking institutions

was based on ownership structure

represented by the shares of stock owned by the various groups of shareholders into two
tiers on the basis of base as per CBK banking survey, 2014. From each class four
members institutions were identified by simple random sampling provided that they had
all the four key departments (Finance, credit, supervision, debt and risk and risk
compliance). The study sampled 43 banks because Charterhouse bank did not publish
accounts as it was under statutory management. This resulted into an aggregate sample
size of 172 respondents, which the researcher regarded as adequate since it represents all
the critical extremes in the industry.

62

Table 3.2: Sampling Design

Bank Category

No. of Banks

Foreign banks
Local banks
Total

31
12
43***

No. of bank
executives
4
4
4

Sample size
124
48
172

*** Charterhouse Bank was under statutory management not included

Source: CBK, 2013
3.5 The Instruments
The study collected both primary and secondary data. Primary data was collected using
questionnaires that were administered on a face to face basis as well as through email
and allowed for any clarifications. The data was obtained from mortgage; credit; debt
recovery and risk & compliance managers from 43 banks. Secondary data was collected
from annual published financial statements and bank supervision records at the Central
Bank of Kenya. Both questionnaires and secondary data collection forms were divided
into six sections, the first section comprised of personal data of the bank, section two
covered CBK regulatory requirement, section three covered questions on Corporate
Governance; section four covered questions on Capital Requirement; section five
covered questions on Credit Risk Management and section six cover questions on
Liquidity Management.
Secondary data was obtained from the most recent annual published financial
statements and banks supervision records at the Central Bank of Kenya and the Banking
survey manuals. Cooper and Schindler (2006) further explained that secondary data is a
useful qualitative technique for evaluating historical or contemporary confidential
public records, reports, government documents and opinions. This study used primary
data collected using questionnaires. Ngumi (2013) observed that secondary data analysis
is efficient and economical because data collection is typically the most time-consuming
and expensive part of a research thesis.

63

3.6 Data Collection Procedures

Primary data was collected through the administration of questionnaires to banks
executives from commercial banks located in Nairobi County in Kenya. Two research
assistants were engaged to mainly make follow-up of the administered questionnaires.
The entry point to the banks was mainly through the customer care departments. After
the approval of the proposal by the University, a meeting was held between the
researcher and research assistants, who were engaged to undertake the data collection.
On the 5th of September 2014, a training session was held between the research assistants
and the researcher to go through the questionnaire in order to clarify any question that
was not clear to them. The data collection process started on 6 th September 2014 and
ended on 30th September 2014. The study also employed secondary data for the
independent and dependent variables that were collected by the use of secondary data
forms.
3.6.1 Pilot Test
Prior to actual collection of data, a pilot test was conducted to obtain some assessment of
the questions validity and the likely reliability of the data collected. It was during the
pre-test of the instrument that the researcher assessed the clarity of the instrument and
the ease of use of the instrument. The study used different groups of experts in the field
of finance and accounting and issued them with the questionnaires. These experts
assessed if the questionnaires helped in establishing the effects of CBK regulatory
requirement on financial performance of commercial banks in Kenya. The coefficient of
the data gathered from the pilot study was computed with the assistance of Statistical
Package for Social Sciences (SPSS). A coefficient of above 0.5 was obtained and this
indicated that the data collection instruments were valid. The recommendations from the
finance and account experts and the pilot study respondents were used to improve on the
data collection instruments. The reliability of the questionnaires was determined using
test-retest method. A reliable measurement is one that if repeated a second time gives the
same results as it did the first time (Mugenda & Mugenda, 2008).
3.7 Data Processing and Analysis.
The researcher incorporates 43 out of the 44 commercial banks operating in Kenya and
focuses on the period between 2009 and 2013. This choice of 43 banks was guided by

64

econometric theory for panel data analysis, which advocates for balanced panels for
better regression results (Baltagi, 2005). The researcher first analyzed both foreign and
local banks together. The data was then divided into two sets, foreign and local, and
regression analysis done on each set to eliminate the effects of the dummy variable
representing ownership structure. Ratio analysis was employed to calculate the corporate
governance, capital requirement, credit risk management and liquidity management and
performance among commercial banks measures by running the data through excel. The
data was then analyzed using normal regression analysis and random effects panel data
analysis. A panel data set is one that follows a given sample of individuals over time and
thus provides multiple observations of each individual in the sample. One of the main
advantages of Panel data is that it enables the researcher to control unobserved
heterogeneity and secondly since panel data has both cross-sectional and time series
dimensions, it provides the researcher with sufficient data points to reduce the likelihood
of biasness in the parameter estimators.
The data obtained were analyzed using descriptive statistics and inferential statistics
(correlation analysis and panel multiple regression analysis). The panel methodology
was aided by SPSS version 20.0 software. After extracting data from the financial
statements, an Excel program was used to compute the relevant ratios for each of the
companies across time. Descriptive statistics were used to summarize and profile the status of

corporate governance, capital requirement, credit risk management and liquidity

Management and performance among commercial banks. The inferential statistics were
used to test a number of hypothesized relationships so as to allow generalization of the
findings to a larger population.
Multiple linear regression models were employed to establish the influence among
predictor variables. Pearson correlation was also applied to establish the strength of the
linear relationship between each of the independent variables and the dependent
variables. T-statistic was used to determine the relative importance of each independent
variable in influencing financial performance. In the case of t-test and f-test, a statistic
was considered to be statistically significant when the value of the test statistic falls in
the critical region and in this case, the null hypothesis was rejected and the alternative
was upheld. This was done to determine the relative contribution (sensitivity) of each

65

independent variable in affecting the performance among 43 banks sampled for five
years (December 2009-2013). The multiple linear regressions model is shown on
equation (1-4) below. Statistical Package for Social Sciences (SPSS) was used to assist
in data analysis because it has in-build formulas. SPSS software is a comprehensive
system for analysis of data and can take data from any type of file and use it to generate
tabulated reports, charts, compare means, correlation and many other techniques of data
analysis (Microsoft Corporation, 2003). The moderating effect of bank ownership was
also to be evaluated by using it as a dummy variable (0=Foreign; 1=Domestic).
3.8 Empirical Model
In order to analyze the relationships between the dependent variable and independent
variables a conceptual framework and multiple linear regression analysis was used. The
study employed the linear regression model to analyze the effects CBK regulatory
requirement had on financial performance among commercial banks. Given that the data
had both time series and cross-sectional dimensions, the study estimated a linear panel
regression as proposed by Greene (2008). The study adopted a model similar to that used
by many of the studies done in the area of CBK regulatory requirement and financial
performance (Ngumi, 2013; Ogilo, 2012; Ngigi, 2012).
Panel data analysis is more advantageous than either cross-section or time series alone
because it allows the researcher to account for unobservable heterogeneity. According to
Balgati (2005) using panel data makes it possible to achieve a bigger sample size than
with either time series or cross-section since panel data has both time series and crosssection dimensions. Panel data yields much larger data set with more variability and less
collinearity among the variables than the characteristics of the cross-section or time
series data. More reliable estimates and more complicated behavioral models can be
tested with less limiting assumptions due to the expanded more informative data. Panel
data sets are also better able to recognize and estimate the effects that cannot be merely
detected in pure cross-sections or pure time-series data. Since the study focused only on
42 non-financial companies listed in the NSE, using cross-section data alone would have
given a small sample size but after incorporating the time dimension of seven years, the
sample was expanded to 282 observations. The resultant large sample made it possible
for the study to satisfy asymptotic requirements (Gujarati, 2003).

66

The general empirical model used in the study was defined as follows:

Yit=0+Xit+..(3.1a)
This Equation was transformed to Random Effects model by specifying E it as shown in
Equation 3.1b.
it = Vi + Uit .. (3.1b)
Where Yit is the dependent variable denoting financial performance of Bank i at time t i
denotes the observation (banks), i = 1,.......,43 while t is the time period t =2009, ... ,
2013; Xit denotes a vector of independent variables are coefficients to be estimated, a
0 is a constant term, and it is a composite error term. Where Vi denotes heterogeneity
effects and Uit denotes idiosyncratic disturbances. Equation 3.1 was expanded to obtain
equations 3.2 and 3.3 which were used for estimation. The general multiple regression
models that was specified and tested in this study are given in equation in for equations
as follows:
ROAit =0+ 1CGit +2CRit + 3CRMit + 4LMit +.3.2
ROEit = 0+ 1CGit +2CRit + 3CRMit + 4LMit + .3.3

Where:
ROAit = Return on assets of Banks i at time t
ROEit =Return on equity of Bank i at time t
0 = Constant for each bank (fixed effects)
(i; i=1,2,3,4 ) = Regression coefficients values
(CGi; CRi; CRMi; LMi; i=1, 2, 3, 4)= values of various independent variables
it =composite error term(the residual error of the regression)
CGit= Corporate Government of banks i at time t.
CRit = Capital requirement of banks i at time t.
CRMit= Credit Risk Management of banks i at time t.
LMit= Liquidity Management of banks i at time t.
t= 2009.2013

3.8.1 Moderating effect model

To determine the moderating effect of CBK regulatory requirements (corporate

governance, capital requirement, credit risk management and liquidity management) on

the relationship between the financial performance among commercial banks and
performance, the study specified equations 3.4 and 3.5 as follows:

67

ROAit =0+ 1CGit*M +2CRit*M + 3CRMit*M + 4LMit *M +.3.3

ROEit = 0+ 1CGit*M +2CRit*M + 3CRMit*M + 4LMit *M +.3.4

Where: M = mediating variable= Bank Ownership (0=Foreign; 1=Domestic; 2= both

foreign and local)
3.8.2 Operationalization of Variables
Constructs of each item of the variable were measured by scale as summarized in
Table 3.3 Measurement of variables

Dependent
Variables

Variables

Measures

Notation

Profitability

Return on Assets=Net Income divided by

Total Asset
Return on Equity=Net Income after Taxes
divided by Total Equity Capital

ROA

Operating income to Total income

CG

Capital Adequacy =Equity/Total Asset

CR

Asset Quality=Non-performing Loans to

Total loans
Total Loans to Total Customer Deposit

CRM

Independent Corporate
Variables
governance
Capital
Requirement
Credit Risk
Management
Liquidity
Management

68

ROE

LM

CHAPTER FOUR

RESULTS AND DISCUSSION

4.1 Introduction
This chapter describes the actual findings derived from the questionnaires and secondary
data forms and links them to the objectives of the study. Data analysis was undertaken in
three steps; data preparation, data analysis and reporting. After field work, the data was
prepared by checking the questionnaires and data forms, editing, coding, transcribing
and cleaning the data. The data was analyzed using Statistical Package for Social
Sciences (SPSS version 20.0). The study employed descriptive Statistics, Pearsons
correlation coefficients, multiple regression analysis and ANOVA test.
Descriptive statistics was used to describe the study variables from the sample profile.
The ANOVA test was used to examine the existence of significant differences the effects
of capital requirement, Liquidity Management Credit risk management and Corporate
Governance on the financial performance of commercial banks. Regression analysis was
used to test the research hypotheses, determine the existence of a significant relationship
between the variables under study and to ascertain the effects of CBK regulatory
requirement had on the performance of commercial banks. Attempts are made to explain
why the findings are the way they are and to what extent they are consistent with or
contrary to past empirical findings and theoretical arguments. The discussion of the
findings is guided by objectives of the study.
4.2 Pilot study results
A pilot study was conducted to pretest the tool used in data collection. Nineteen
questionnaires were administered to 19 investment banks which were randomly selected.
Among nineteen investment banks that were piloted only seventeen responded
translating to a response rate of 89.5%. In this study, an internal consistency was done
using Cronbach's Alpha to measure how well the items were correlated to each other for
all the questionnaires issued to different groups of pilot respondents. The 93 rule of the

69

thumb for Cronbach Alpha is that the closer the alpha is to 1 the higher the reliability
(Sekaran, 2010) and a value of at least 0.7 is recommended.
Table 4.1 Summary of Cronbachs Alpha Reliability Coefficient
Reliability Statistics
1
2
3
4

Number of items

Capital Requirement (CR)

Liquidity Management(BL)
Credit risk management (CRM)
Corporate Governance(CG)

12
10
10
9

Cronbachs Alpha
0.920
0.884
0.863
0.817

Corporate governance 0.817, capital requirement had alpha of 0.920, credit risk
management 0.863 and liquidity management 0.884. All the measures had Cronbach's
Alpha values greater than 0.7 which fall in the acceptable limit. This indicated a strong
internal consistency among measures of variable items. This implied that respondents
who tended to select high scores for one item were likely to select high scores for the
others. Similarly, those who select low scores for one item were likely to select low
scores for the others. The data collection instrument was therefore reliable and
acceptable for the purposes of the study. This enhanced the ability to predict outcomes
using the scores and just the aggregation of the arithmetic mean.
4.3 Summary statistics
4.3.1 Primary data analysis
The research instruments were administered to the sampled target population as
indicated in chapter three while a self-constructed data collection sheet was used to
collect secondary data.
Table 4.2 Response rate
Description

Frequency

Percent

Usable Questionnaires

134

78

Unanswered and unusable questionnaires

38

22

Total

172

100

70

During the survey, one hundred and seventy two questionnaires were sent to banks
executives. However, only 140 questionnaires were returned and out this 6 were
incomplete and were discarded thus the complete questionnaires analyzed for this study
was 134. De Vaus (2002) stated that response rate is equal to the number of
questionnaires returned divided by the sample size and the result multiplied by one
hundred. Using this formula the response rate for this study was: 134/ (172) X 100 =
78%.

The response rate is considered adequate given the recommendations by:

Saunders, Lewis and Thornhill (2009) who suggested a 30-40% response; Sekaran
(2010) who documented 30% and Mugenda & Mugenda (2003) who advised on
response rates exceeding 50%. Based on these assertions, it implied that the response
rate for this study was adequate.
This section presents the findings and discussion in the order of the five specific
objectives of the study. Frequencies and descriptive statistics are presented first followed
by inferential statistics. The questionnaire responses were based on a likert scale which
was coded with numerical values for ease of data analysis. The values assigned to the
likert were 1=strongly disagree, 2=disagree, 3=neutral, 4=agree and 5=strongly agree
Respondents Profile
The respondents were asked questions on their position. This question helped researcher
to establish if the from their position, deals with the CBK regulatory requirement.

Figure 4.1 Distribution of respondents profile

From the figure 4.1 above, majority of the respondents (37.3%) were from credit, 9.7%
from risk and compliance, 34.3% from mortgage and 18.7% from debt recovery
departments. These findings were similar to Ngumi, (2013).This results demonstrated
that majority of the respondents from the categories were staff who participated in the

71

study. This was a clear indication that data was gathered from the respondents with
technical knowledge and skills on CBK regulatory requirement.
Respondents Work Experience
The respondents were asked questions on how long they had been working in the
commercial banks. This was to ascertain to what extent their responses could be relied
upon to make conclusions for the study based on their working experience.

Figure 4.2 Respondents work experience

The study findings showed that 54.9% of the respondents had worked for 6-10 years,
37.3% had worked for 1-5 years, 6.4% had worked for over 10 years and 1.4% had
worked for less than 1 year in the banks. This indicated that majority of the respondents
had worked in the commercial banks for a long time and thus they understood technical
issues on the effects of CBK regulatory requirement on financial performance in
commercial banks. This was in tandem with findings by Braxton, (2008) that
respondents with a high working experience assist in providing reliable data on the
sought problem since they have technical experience on the problem being investigated
by the study. The results also indicated that employment in banks was stable. Most banks
have turned themselves into employers of choice in the country by initiating several
employee retention strategies and hence many respondents had worked for the banking
sector for more than six years.

72

Education Level of Respondents

The respondents were asked questions on their highest level education. This was to
ascertain if they were equipped with relevant knowledge and skills on CBK regulatory
requirement.
Table 4.3: Level of Education of Respondents
Highest Education level

Frequency

Diploma
Bachelors
Masters
PHD/Doctorate
Total

Percent
37
76
16
5
134

27.6
56.7
11.9
3.7
100.0

The study findings as indicated in table 4.3 majority of respondents (56.7%) had attained
a first degree followed by diploma holders at 27.6% and 11.9% of respondents had
masters degree. Those with doctorate degree stood at 3.7% of the total percentage
respondents. These findings were in support of Ngumi, (2013) results that indicated the
cumulative percentage of respondents with at least a bachelors degree was 72.3% show
a high level of education. It was therefore deduced from the findings that employees of
banks in Kenya, to a large extent, have good quality education that includes both
bachelors degree and post graduate levels of education.
Stocks Listing of the Banking
The study was interested in knowing banks listing on the stock exchange. The
respondents were asked to indicate whether the institutions were listed on the Nairobi
Security Exchange (NSE). The question was asked to establish whether the banks listing
had some relationship with its current performance. Data obtained was analyzed and
presented as shown in Figure 4.1 and results indicates that majority (80% ) of the banks
that participated in the study were indeed listed on the NSE. Only 20% indicated that
they are not listed on the NSE.

73

Figure 4.3: Stocks Listing of the Banks

4.3.1.1 Effect of CBK regulatory requirements on financial performance of bank
Corporate governance
The first objective of the study was to establish if corporate governance in banks affect
financial performance of commercial banks in Kenya. The researcher first sought to
know the number of directors in the board who represent the controlling groups.
Information on number of directors in the boards of institutions under study that also
represent controlling group was deemed important because it would enable in knowing
whether good governance is followed in organizations.
Table 4.4: Representation of Directors in the Board
Representation of directors

Frequency

Percent

1 3 directors
4 9 directors
more than 13 directors

117
4
13

87
3
10

Total

134

100.0

The results shown in table 4.4 indicated that banks had a varying representation of
directors in the board who represent the controlling group. Majority of respondents (87

74

percent) said that boards had between 1-3 directors in the board, 3 percent have between
4- 9 directors while only 10 percent have more than 13 directors in the board who also
represent the controlling group. Hence, the researcher concluded that the institutions
had varying representation in the controlling group as directors. According to generally
accepted corporate governance practices, up to eleven (11) directors is the required
number to make an effective board. The Central Bank of Kenya requires all institutions
licensed under the Banking Act, to have at least five directors, at least three-fifths of who
should be Non-Executive Directors, in order to achieve the necessary balance.

Table 4.5: Effects of Corporate governance on financial performance

Statements
Corporate governance
The bank has a clear list of the share owned by members of the BoD
The firm publishes and distributes its financial results and management analysis
The audit section of the firm is performing its duties as expected
Bank provides equal access to information for shareholders and investment
analysts
The bank regularly holds self-assessment of good corporate governance
There are potential conflicts of interest between the bank and the member of its
BoD
The bank has well written corporate governance
Revealed code of conduct/ethics clearly
Shareholders rights and responsibilities are adhered to
The bank regularly holds self-assessment of good corporate governance

Mean

SD

4.26
4.25
4.19
4.19

.836
.617
.768
.702

4.17
3.98

.672
.772

3.91
3.29
3.91
3.88

0.759
1.080
.815
1.022

Average

4.082

0.7736

The respondents were asked to indicate the extent of their agreement with given
statements as shown in table 4.5 shows ten statement questions that represent issues on
capital requirement as an effect of central bank requirement on bank performance. The
responses were tabulated in table 4.5 and analyzed using mean and standard deviation on
a likert scale ranging from 1-5. In the likert scale where 5 represented strongly agree
and 1 represented strongly disagree (Likert, 1932). . The questions concern managers
judgment on capital requirement as its effects of CBK regulatory requirement on bank
performance.
The results indicate that the bank has a clear list of the share owned by members of the
BoD (mean=4.26, standard deviation=0.836), The firm publishes and distributes its
financial results and management analysis (mean=4.25, standard deviation= 0.617), The

75

audit section of the firm is performing its duties as expected (mean=4.19, standard
deviation= 0.768), firm provides equal access to information for shareholders and
investment analysts (mean=4.19, standard deviation= 0.702) bank regularly holds selfassessment of good corporate governance (mean=4.17, standard deviation= 0.672).
There are any potential conflicts of interest between the bank and the member of its BoD
(mean=3.50, standard deviation= 0.966), The bank has well written Corporate
Governance Policies; such as which covers specification on BoDs duties, disclosure
rules, shareholders rights etc. (mean= 3.38, standard deviation= 1.197) Revealed code of
conduct/ethics clearly (mean=3.29, standard deviation= 1.080). The results also indicate
that the shareholders rights and responsibilities are well adhered to; e.g. rights to vote,
28 days notice of their meetings, etc. (mean= 3.91 standard deviation=.815) and the
bank regularly holds self-assessment of good corporate governance (mean= 3.88
standard deviation= 1.022). The adoption of corporate governance obtained a grand
mean of 4.082.
Capital requirement
The second objective of the study was to establish if capital requirement affect financial
performance of commercial banks in Kenya. The respondents were asked to indicate the
extent to which they agreed to a given statements on and table 4.6 shows six statement
questions that represent issues on capital requirement. The responses were tabulated in
table 4.7 and analyzed using mean and standard deviation on a likert scale ranging from
1-5. In the likert scale where 5 represented strongly agree and 1 represented strongly
disagree (Likert, 1932).

The questions concern managers judgment on capital

requirement as an effect of CBK regulatory requirement on bank performance.

Table 4.6: Effects of Capital requirement on financial performance
Capital requirement
Statements
Capital requirement is one of effects of CBK regulatory requirement on
financial performance
Transfer of ownership influences bank performance
Capital requirement structure of banks is highly regulated
High capital requirement in banks leads to low profits
Bank is able to supervise, oversight their system to compute minimum capital
requirements.
In this bank there is policy concerning definition of capital requirement beyond
cash or government security whether regulator and supervisory authorities
verify source capital or not
Average

76

Mean
4.082

SD
0.7736

4.17
4.28
3.88
4.19

.672
0.773
1.002
.768

4.26

.836

4.144

0.8041

In table 4.6 above the effects of Capital requirement on financial performance was
(mean=4.082, standard deviation=0.7736), Transfer of ownership influences bank
performance (mean=4.17,standard deviation=0.672), Capital requirement structure of
banks is highly regulated (mean=4.28 standard deviation =0.773). High capital
requirement in banks leads to low profits (mean=3.88 standard deviation =1.002) , Bank
is able to supervise and oversight their system to compute minimum capital
requirements (mean=4.19 standard deviation =0.768) and finally there is a policy
concerning definition of capital requirement beyond cash or government security
whether regulator and supervisory authorities verify source capital or not (mean=4.26
standard deviation=.836). The effect of capital requirement had grand mean of 4.144.
Credit risk management
The third objective of the study was to establish if credit risk management affects
financial performance of commercial banks in Kenya. The respondents were asked to
indicate the extent of their agreement with statements given on and table 4.7 shows five
statement questions that represent issues on credit risk management. The responses were
tabulated in table 4.7 and analyzed using mean and standard deviation on a likert scale
ranging from 1-5.

In the likert scale where 5 represented strongly agree and 1

represented strongly disagree (Likert, 1932).

The questions concern managers

judgment on credit risk management as an effect of CBK regulatory requirement on

bank performance.
Table 4.7: Effect of CBK regulatory requirements on financial performance
Credit risk Management
Statements
Credit risk Management is one of effects of CBK regulatory requirement on
financial performance
Credit risk Management affects financial performance of our bank
Improving bank supervision and bank risk management enhances bank
performance
Profitability of our bank is influenced by bank risk management
Capital requirement reduces bank credit risk
Average

Mean
3.91

SD
.815

3.88
3.29

1.022
1.080

3.74
3.98
3.76

0.633
.772
0.8644

Table 4.7 above indicated that statement on Credit risk Management is one of effects
of CBK regulatory requirement on financial performance had mean of 3.91 and standard
deviation 0.815, Credit risk Management affects financial performance of our bank had

77

mean of 3.88 and standard deviation 1.022, Improving bank supervision and bank risk
management enhances bank performance had mean of 3.29 and standard deviation
1.080, Profitability of our bank is influenced by bank risk management had mean of
3.74 and standard deviation 0.633 and finally capital requirement reduces bank credit
risk had mean of

3.98 and standard deviation 0.772 . The effect of credit risk

management had grand mean of 3.76

Liquidity Management
The fourth objective of the study was to establish if liquidity management affects
financial performance of commercial banks in Kenya. The respondents were asked to
indicate the extent of their agreement with given statements on and table 4.9 shows four
items questions that represent issues on liquidity management. The responses were
tabulated in table 4.8 and analyzed using mean and standard deviation on a likert scale
ranging from 1-5.

In the likert scale where 5 represented strongly agree and 1

represented strongly disagree (Likert, 1932).

The questions concern managers

judgment on liquidity management as it effects of CBK regulatory requirement on bank

performance.
Table 4.9: Effect of liquidity management on financial performance
Statements
Liquidity management is one of the effects of CBK regulatory requirement on
financial performance
Liquidity management affects financial performance of our bank

Mean
4.13

SD
0.785

3.91

0.759

Customer deposit to total asset and customer deposit is used as financial ratio to
measure our bank liquidity

3.91

0.633

It is important for CBK to ensure full compliance with minimum liquidity

requirement

4.17

.672

Average

4.03

0.71225

Table 4.9 indicate that statement on Liquidity management is one of effects of CBK
regulatory requirement on financial performance had mean of 4.13 and standard
deviation 0.785, Liquidity management affects financial performance of our bank had
mean of 3.91 and standard deviation 0.759, Customer deposit to

total asset and

customer deposit is used as financial ratio to measure our bank liquidity had mean of
3.91 and standard deviation 0.633 and finally the statement on It is important for CBK

78

to ensure full compliance with minimum liquidity requirement had mean of 4.17 and
standard deviation 0.672 . Finally the effect of capital requirement had grand mean of
4.03
4.3.1.2 Ownership Structure of the Organizations
In order to gain an in-depth understanding of the current ownership structure in terms of
share percentage of the banks under study and whether the share percentage had changed
with time, the researcher asked respondents to indicate the percentage of shares owned
by the state for state owned banks, managers, workers, and domestic individuals,
institutional and foreign investors. In the banks surveyed, though the state still had
majority shares of over 70% in state-owned banks, from the findings it was evident that
the state was slowly withdrawing from active participation in some banks by
periodically offloading shares as some respondents noted. This may be seen as one way
of encouraging other participants in owning some of its institutions hence in line with
the privatization process that the government started way back in the 90s. In locallyowned banks and foreign banks, share ownership varied. At least managers and workers
held between 0 5 percent of the shares each in local banks as 20% of respondents in
the study noted while in foreign-owned banks employees owned up to 20% of the
shares. For domestic individual investors, domestic institutional investors and foreign
investors each owned up to 25% of shares. This can be termed as a move to encourage
ownership of the firm to other investors who are not really the owners. The first research
question sought to establish the type of bank ownership structure that exists in order to
find out the representation of the banks in the study. The type of bank ownership
represents the status of majority shareholders. This survey uses three main types of
ownership: foreign owned banks, state-owned banks and local-owned banks. From the
data obtained from the field regarding type of bank ownership. Forty percent of the
banks that participated in the study were foreign owned, 32.5% had substantive
government participation while 27.5% were locally owned.

79

Figure 4.10: Banks Ownership Structure

4.3.2 Secondary Data Aanalysis

The study used descriptive statistics for analysis of the dependent and independent
variables. The purpose of descriptive statistics is to enable the researcher to
meaningfully describe a distribution of scores or measurements using indices or
statistics. The type of statistics or indices used depends on the type of variables in the
study and the scale of measurement. Measures of central tendency are used to determine
the typical or expected score or measure from a sample of measurements or a group of
scores in a study. Measures of central tendency are used to give expected summary
statistics of variables being studied. The commonly used measures of central tendency
are mode, mean and median. This study particularly used mean/average, median, range,
percentages and standard deviation to analyze the objectives which were to establish
how Corporate Governance, Capital Requirement,

Credit Risk Management and

Liquidity Management affects the performance of commercial banks in Kenya as shown

in table 4.10.

80

Descriptive Statistics of Independent Variables

Table 4.10: Independent Variables one-Sample Statistics
Variables

Corporate Governance
Capital requirement
Credit risk Management

215
215
215

liquidity Management

215

Minimum

One-Sample Statistics
Maximum
Mean

40.1
20.5
4.4
37

56.5 50.6000
23 21.6005
8 5.7200
44 40.6005

Std.
Deviation

Std. Error
Mean

5.29685
.70820
1.10005

.36124
.04830
.07502

2.02218

.13791

Table 4.11: Independent Variables One-Sample Test

One-Sample Test
Test Value = 0
t

Corporate governance
140.072
Capital requirement
447.228
Credit risk Management 76.243
Liquidity Management 294.395

df

Sig. (2tailed)

214
214
214
214

.000
.000
.000
.000

Mean
Difference
50.6000
21.6004
5.7200
40.6004

95% Confidence Interval

of the Difference
Lower
Upper
49.888 51.312
21.505 21.695
5.572 5.8679
40.329 40.872

Corporate Governance
Corporate Governance (CG) had a mean value of 50.600 with minimum and maximum
values of 40.1 and 56.5 respectively. The Corporate Governance (CG) had standard
deviations of 29.7% which shows little dispersion of operating income to total income
ratio from its mean for the commercial banks in Kenya. The Corporate Governance (CG)
which is expressed by average operating income to total income ratio was 50.6. This was
lower than that of Ongore and Kusa (2013) who found that management efficiency/
Corporate Governance), proxies by operating income to total income were 72.23 on
average. The study shows that in Kenya more than 51% of commercial banks income is
derived from the conventional intermediation (operating) function. These results are
similar to Ogilo (2012) who evaluated the impact of credit risk management on financial
performance of commercial banks in Kenya. Ongore and Kusa (2013) also reported the
same results after examining the determinants of financial performance of commercial
banks in Kenya.

81

4.3.1.3 Financial Performance of Commercial Banks in Kenya-(Dependent

variable)
Table 4.12: Financial Performance of Commercial Banks in Kenya
Statements
The bank had good improvement on return on equity in last three years

Mean
4.28

SD
0.773

The bank had good improvement on return on asset in last three years

4.13

0.785

The bank has better return on equity than industry average

( Benchmark)
The bank has better return on asset than industry average ( Benchmark)

3.74

0.633

3.91

0.633

Average

4.015

.706

In this study bank performance represents the financial performance improvement. Bank
performance also can be seen in comparison with the related industry as a benchmark.
Table 4.12 shows four item questions that represent bank performance. The responses
were tabulated in table 4.12 and analyzed using mean and standard deviation on a likert
scale ranging from 1-5. In the likert scale where 5 represented strongly agree and 1
represented strongly disagree (Likert, 1932).

The questions concern managers

judgment on return on equity and its benchmarks and return on assets and its
benchmarks. It can be revealed that 60% of the respondents agreed that the bank had
good improvement of return on equity in the last three years. Similarly, 70% noted that
the bank had good improvement of return on assets in the last three years. As concerns
the industry, 57.5% of the respondents indicated that the bank had better return on equity
than industry average while 67.5% agreed that the bank had better return on assets than
industry average. Hence, the researcher deduced that the banks had better performance
on both return on equity and assets in the industry irrespective of the type of ownership.
The financial performance of commercial banks in Kenya was expressed by proxy
indicators: ROA and ROE as shown by table 4.12.
Capital Requirement
The study found that the mean value of the Capital Requirement (CR) was 21.6005, with
minimum and maximum values of 20.5 and 23 respectively. In terms of standard
deviations the capital requirement had standard deviations of .70820 which shows a high
dispersion of Capital Adequacy ratio (Equity/Total Asset) from its mean for the
commercial banks in Kenya. Looking at the minimum, mean and maximum values,

82

generally, the statistics indicate a slight variation in the capital requirement determinants
of profitability of banks in Kenya. The average Capital Ratio (CR) of Commercial Banks
in Kenya was 21.60. This average is way above the statutory minimum of 12.0 percent
set by CBK (Olweny & Shipho, 2011).
This shows that the Kenyan commercial banks hold more capital than required. This
could imply that banks could prefer less risky investment, which results in lower profit.
This gives banks adequate buffer to absorb unforeseen shocks. The banking sector is
expected to maintain its growth momentum supported by the rollout of full file credit
information sharing, regional integration initiatives, advances in information and
communications technology and the introduction of the devolved governance system in
Kenya. As a result, if equity requirements are conventionally viewed as a function of the
balance sheet's debt/equity ratio, then no equity or only a fraction (related to the recourse
provided) of that required by conventional debt financing is required to fund assets
through a securitization
Credit Risk Management
The mean value of Credit risk management (CRM) was 5.72 with minimum and
maximum values of 4.4 and 8.0 respectively. The Credit risk management (CRM) had
also standard deviations of 10% which shows little dispersion of Asset Quality (Nonperforming loans to total loans) ratio from its mean for the commercial banks in Kenya.
The Credit risk management (CRM) which is expressed by average asset quality of the
commercial banking sector in the stated period was as high as 5.72, this was lower than
that of Ongore and Kusa (2013) who found that average asset quality ratio ( Credit risk
management) was 15.52. This shows that there is low exposure of banks to credit risk.
Liquidity Management
The mean value of Liquidity Management (LM) was 40.6005 with maximum and
minimum values of 44.0 0 and 37.0 respectively. The Liquidity Management had also
standard deviations of 2% which shows little dispersion of liquid assets to total assets
ratio from its mean for the commercial banks in Kenya. The Table 4.10 also shows that
the average Liquidity Management was 40.6%. This indicates that commercial banks in
Kenya use 40.6% of customers deposit on lending. This was lower that Ongore and

83

Kusa (2013) whose study found that the average total loans to total deposits were
77.50%. From the study we can conclude that the customers deposit is one of the
cheapest sources of fund due to the high margin between deposit and lending rate that
banks utilize to generate income.
Inferential Analysis
Inferential statistics analysis was conducted through the use of correlation analysis and
regression analysis to determine the relationship between the independent and the
dependent variables.
Diagnostic Test
Diagnostic testing has become an integral part of model specification in econometrics.
There have been several important advances over the past 20 years. Various diagnostic
tests were conducted to ensure that the coefficients of the estimates were consistent and
could be relied upon in making economic inferences. As argued by Greene (2002)
regression can only be accurately estimated if the basic assumptions of multiple linear
regressions are observed.
Normality test
A normal distribution is not skewed and is defined to have a coefficient of kurtosis.
Jarque-Bera formalizes this by testing the residuals for normality and testing whether the
coefficient of skewedness and kurtosis are zero and three respectively (Brooks 2008).
The study used Jarque-Berras statistic to determine whether the sample data have the
skewedness and kurtosis matching a normal distribution. It is a test based on residuals of
the least squares regression model. For normal distribution JB statistics is expected to be
zero (Guajarati, 2007). In this study JB statistics values were: Corporate Governance
(skewedness 0.196, kurtosis 0.623); Capital requirement (skewedness 0.196, kurtosis
0.623),Credit Risk Management (skewedness 0.196, kurtosis 0.623) and Liquidity
Management(skewedness 0.196, kurtosis 0.623). This result was consistent with Ongore
and Kusa (2013) in their study even though their JB statistics result was 0.09 with
skewedness of 0.14 and kurtosis of 3.38. Thus, the JB is very close to zero and that the
variables are very close to normal distribution. This implies that the research variables
are normally distributed.

84

Table 4.13 Results of Normality Diagnostic Test

Variable

Descriptive
Statistical

Statistical
Values

Std.
Error

Comment

Corporate Governance

Skewedness
Kurtosis

.196,
.623

.36124

Capital requirement

Skewedness

.196

.04830

Normally distributed
Normally
distributed
Normally distributed

Kurtosis

.623

Credit
Management

risk Skewedness

Liquidity Management

Normally distributed

.196

Kurtosis

.623

Skewedness

.196

Kurtosis

.623

.07502

Normally distributed
Normally distributed

.13791

Normally distributed
Normally distributed

Multi-collinearity Test
Multi-collinearity is a problem in multiple regressions that develops when one or more of
the independent variables are highly correlated with one or more of the other independent
variables. If an independent variable is an exact linear combination of the other
independent variables, then we say the model suffers from perfect collinearity, and it
cannot be estimated by OLS (Brooks 2008). Failure to account for perfect
multicollinearity results into determining regression coefficients and infinite standard
errors while existence of imperfect multi-collinearity results into large standard errors.
Large standard errors affect the precision and accuracy of rejection or failure to reject the
null hypothesis. During estimation, the problem is not lack of multi-collinearity but rather
its severity. According to Gujarati (2004), the standard statistical method for testing data
for multi-collinearity is analyzing the explanatory variables correlation coefficients (CC);
condition index (CI) and variance inflation factor (VIF). Therefore in this study, to
determine multi-collinearity variance inflation factors (VIF) and tolerance were used. For
tolerance, values of less than 0.1 suggest multi-collinearity while for values of VIF that
exceed 10 are often regarded as indicating multi-collinearity. The average data for 43
commercial banks in the last 5 year period (2009-2013) was used.

85

Table 4.14: Multicollinearity Test

Variables

Collinearity Statistics
Tolerance

VIF

Corporate Governance

0.940

1.064

Capital Requirement

0.974

1.027

Credit risk Management

Liquidity Management

0.992
0.951

1.008
1.051

The results was that VIF for Corporate Governance had VIF of 0.940 and tolerance of
1.064 ; Capital Requirement had VIF of 0.974 and tolerance of 1.027 ; Credit Risk
Management had tolerance of 0.992 and tolerance of 1.008,While Liquidity Management
had VIF of 0.951 and tolerance of 1.051 . The mean VIF for all variables is 1.037 and
tolerance of 0.964. This shows that the variables had a VIF that is less than 10 and
tolerance value of more than 0.1 ruling out the possibility of multi-colliearity (Field,
2009). Therefore, the results imply that there was no multi-collinearity problem among
independent variables.
Autocorrelation test
This study used the Wooldridge test for serial correlation to test for the presence of
autocorrelation in the linear panel data. Serial autocorrelation is a common problem
experienced in panel data analysis and .has to be accounted for in order to achieve the
correct model specification. According to Wooldridge (2002), failure to identify and
account for serial correlation in the idiosyncratic error term in a panel model would result
into biased standard errors and inefficient parameter estimates. The null hypothesis of this
test was that the data had no serial autocorrelation. If serial autocorrelation was detected in
the study data, then the feasible generalized least square (FGLS) estimation procedure
would be adopted. The test for autocorrelation was made by using Durbin and Watson
(1951). Durbin--Watson (DW) is a test for first order autocorrelation that is it tests only for
a relationship between an error and its immediately previous value. This study used
Durbin Watson (DW) test to check that the residuals of the models were not auto
correlated since independence of the residuals is one of the basic hypotheses of regression
analysis. The results in the table 4.11 and 4.12 show that there was no DW statistics that
were close to the prescribed value of 2.0 for residual independence; this implied that the
data had no autocorrelation.

86

Table 4.15 Autocorrelation test with ROE

Model

ROE
Corporate governance
Capital requirement

R
Square

Std. Error of
the Estimate

Durbin-Watson

.091a

.008

-.006

1.25746

1.603

.073a

.005

.001

1.25341

1.621

.000

-.005

1.25674

1.601

.000
.004

-.005
.000

1.25664
1.25393

1.602
1.583

.004

Credit risk management

Liquidity management

Adjusted
R Square

.013a
.067a

Table 4.16 Autocorrelation test with ROA

Model

R
Square

Adjusted
R Square

Std. Error of the

Estimate

Durbin-Watson

.132a

.018

.004

.42646

2.165

Corporate Governance

.086a

.007

.003

.42666

2.208

Capital requirement

.011a

.000

-.005

.42821

2.162

.015a

.000

-.004

.42818

2.157

.113a

.013

.008

.42546

ROA

Credit

Risk

Management
Liquidity Management

1.902

Inferential Analysis of Independent variables

The analysis of variance (ANOVA) on the effects of Central bank regulatory
requirements on bank performance was done to test statistically if the means were
significantly different between these groups.
Table 4.17: ANOVA Corporate Governance and ROA
ANOVA
Return on Asset for Commercial banks
Sum of
df
Mean Square
Squares
Between Groups
7.644
31
.247
Within Groups
31.416
183
.172
Total
39.060
214

Sig.

1.436

Table 4.18: ANOVA Corporate Governance and ROE (Secondary Data)

87

.076

ANOVA
Return on Equity for Commercial banks
Sum of
df
Mean Square
Squares
Between Groups
75.256
31
2.428
Within Groups
261.160
183
1.427
Total
336.416
214

F
1.701

Sig.
.017

Result from table 4.18 revealed that corporate governance with ROE has F statistic of
1.701 and the P-value is 0.017. This P-value is less than 0.05 implying that the mean
difference of corporate governance is no statistically significant with bank performance
(ROE) at a level of significance of 0.05. From Table 4.19 the corporate governance has
the F statistic of 1.436 and the P-value is 0.076 with ROA. The P-value is greater than
0.05 results indicate that there is significant mean difference of corporate governance
with ROA.
Table 4.19: ANOVA Capital requirement and ROA
ANOVA
Return on Asset for Commercial banks
Sum of
df
Mean Square
Squares
Between Groups
2.735
13
.210
Within Groups
36.325
201
.181
Total
39.060
214

F
1.164

Sig.
.308

Table 4.20 : ANOVA Capital requirement and ROE

ANOVA
Return on Equity for Commercial banks
Sum of
df
Mean Square
Squares
Between Groups
50.572
13
3.890
Within Groups
285.844
201
1.422
Total
336.416
214

F
2.735

Sig.
.001

According to table 4.19 capital requirement with ROA has F statistic of 1.164 and the
P-value is 0.0308 which is greater than 0.05 implying that the mean difference of capital
requirement with bank performance (ROA) is statistically significant at a level of
significance of 0.05. According to table 4.20 result revealed that capital requirement

88

with ROE had the F statistic of 2.735 and the P-value is 0.01 which is less than 0.05
results indicate that there is significant mean difference of capital requirement with
ROE.
Table 4.21: ANOVA Credit risk transfer Management and ROA
ANOVA
Return on Equity for Commercial banks
Sum of
df
Mean Square
Squares
Between Groups
23.381
19
1.231
Within Groups
313.035
195
1.605
Total
336.416
214

F
.767

Sig.
.745

Table 4.22: ANOVA Credit risk Management and ROE

ANOVA
Return on Asset for Commercial banks
Sum of
df
Mean Square
Squares
Between Groups
5.191
19
.273
Within Groups
33.869
195
.174
Total
39.060
214

F
1.573

Sig.
.066

According to table 4.21 credit risk management with ROA has the F statistic of 0.767
and the P-value is 0.745 which is greater than 0.05 results indicate that there is
significant mean difference of credit risk management is statistically significant with
bank performance (ROA) at a level of significance of 0.05. According to table 4.22
result revealed that credit risk management with ROE has have the F statistic of 1.573
and the P-value is 0.066 which is greater than 0.05 results indicate that there is no
significant mean difference of credit risk management with ROE.
Table 4.23: ANOVA Liquidity Management and ROE (Secondary Data)
ANOVA
Return on Asset for Commercial banks
Sum of
df
Mean Square
Squares
Between Groups
3.103
22
.141
Within Groups
35.957
192
.187
Total
39.060
214

89

F
.753

Sig.
.779

Table 4.24: ANOVA Liquidity Management and ROE (Secondary Data)

ANOVA
Return on Equity for Commercial banks
Sum of
df
Mean Square
Squares
Between Groups
41.488
22
1.886
Within Groups
294.928
192
1.536
Total
336.416
214

Sig.

1.228

.228

According to table 4.24 Liquidity management with ROA has have the F statistic of
0.753 and the P-value is 0.779 which is greater than 0.05 implying that the mean
difference of liquidity management was statistically significant with bank performance
(ROA) at a level of significance of 0.05. According to table 4.24 result revealed that
Liquidity management with ROE has have the F statistic of 1.228 and the P-value is
0.228 which is greater than 0.05 results indicate that there is no significant mean
difference of Liquidity management with ROE.
Dependent Variable -Financial Performance of Commercial Banks in Kenya.
Descriptive Statistics
Table 4.25: Five-Year Performance of Commercial Banks in Kenya.
Descriptive Statistics
Variables
Return on Asset (ROA)
Return on Equity(ROE)

N
215
215

Minimum Maximum Mean

2.60
4.70
4.0000
25.00
30.90
28.6600

Std. Deviation
.42723
0.25381

Table 4.25 presents the average financial performance of commercial banks as expressed
by ROA and ROE for the year 2009 to 2013. The study found that the mean value of
the average ROA was 4.0 with minimum and maximum values of 2.6 and 4.7
respectively. In term of standard deviations the ROA

had 42.7% which shows high

dispersion of ROA from its mean for the commercial banks in Kenya. This result was
higher than the result of Ongore and Kusa (2013) study which was 1.95 for the year
2001 to 2010. These findings were consistent with the findings of Flamini et al. (2009).
It is important to note that the study results revealed that ROA was twice the average
ROA in Sub-Saharan Africa,(SSA) which was about 2%, Ongore and Kusa (2013).
Thus, it can be concluded that the average ROA of Kenyan banks is above average of the
SSA.

90

The results revealed that the mean value of ROE was 28.66 with minimum and
maximum values of 25 and 30.9 respectively. In terms of standard deviations the ROE
had 25% which shows high dispersion of ROE from its mean for the commercial banks
in Kenya. The study result was almost twice that of Ongore and Kusa (2013) study that
found14.8 for the year 2001 to 2010. From the results above it can be concluded that on
average the financial performance of commercial banks in Kenya has continued to
improve compared to the financial performance of banks in developing countries, the
overall financial performance of commercial banks in the country is good (Flamini et
al., 2009). Compared to other countries bank performances as expressed by the above
ratios, the Kenyan banks' performance is average. This is consistent with the findings of
Flamini et al., (2009). According to the above author the average ROA in Sub-Saharan
Africa, (SSA) was about 2%. Thus, the average ROA of Kenyan banks is double average
of the SSA. This could have resulted in improved bank financial performance which was
observed by the average ROA and ROE for the sector as a whole as 4.0 and 28.66
respectively in the year 2009 to 2013 from the one reported by Ongore and Kusa (2013)
study results that had revealed that ROA, and ROE was 1.95 and 14.8 respectively for
the year 2001 to 2010. This was supported by Sarkisyan (2011) who argued
securitization reduces cost of funds; achieves reliable and constant funding source, credit
exposure, enhance liquidity, diversifies and brings about favorable regulatory/accounting
treatment which lead to increased profit.
Statistical Tests of Significance for Dependent variable
Correlation Analysis between Variables and performance of commercial banks.
It gives the Pearsons coefficient value (correlation test) and the significance value
(measuring significance of the association). In this study, the Pearson r statistic is used
to calculate bivariate correlations Values between 0 and 0.3 (0 and -0.3) indicate no
correlation (variables not associated), 0.3 and 0.5 (-0.3 and -0.5) a weak positive
(negative) linear association, Values between 0.5 and 0.7 (-0.5 and -0.7) indicate a
moderate positive (negative) linear association and Values between 0.7 and 1.0 (-0.7
and-1.0) indicate a strong positive (negative) linear association. The significance of the
relationship is tested at 95% level with a 2-tailed test where a statistically significant
correlation is indicated by a probability value of less than 0.025. This means that the
probability of obtaining such a correlation coefficient by chance is less than 2.5 times

91

out of 100, so the result indicates the presence of an association. Correlation analysis
results for the association between effects of CBK regulatory requirement and the
banks performance of commercial banks is presented in table 4.12 below
Table 4.26:Banks Performance and Effects of CBK regulatory requirement
ROE
ROE
ROA
CR
Spearman
's rho

LM
CRM

CG

Correlation
Coefficient
Sig. (2-tailed)
Correlation
Coefficient
Sig. (2-tailed)
Correlation
Coefficient
Sig. (2-tailed)
Correlation
Coefficient
Sig. (2-tailed)
Correlation
Coefficient
Sig. (2-tailed)
Correlation
Coefficient
Sig. (2-tailed)
N

ROA

CR

LM

CRM

CG

1.000

.011

.008

.070

-.003

-.054

.871

.905

.309

.960

.435

1.000

.023

.048

.035

-.091

.736

.487

.605

.184

1.000

.068

.032

-.192**

.322

.639

.005

1.000

-.100

-.203**

.144

.003

1.000

-.054
.435
1.000

215

215

215

215

215

.
215

**. Correlation is significant at the 0.01 level (2-tailed).

Return on Equity (ROE), Return on asset (ROA), Capital Requirement(CR) , Liquidity
Management(LM) , Credit risk management and Corporate governance (CG

This section presents the relationship between the identified Corporate Governance,
Capital Requirements, Credit Risk Management and Liquidity Management and its
relationship with banks performance as expressed by ROA and ROE
Corporate Governance and Financial performance of Banks in Kenya.
From table 4.26 results indicated that Corporate Governance had R of -0.54 with ROE
at 95% confidence levels. This correlation coefficient value was between -0.5 and -0.7
indicating a moderate negative linear association between Corporate Governance and
ROE. While Corporate Governance also has a correlation with ROE and ROA at 95%
confidence levels had R of-0.091 with ROA at 95% confidence levels is correlation
coefficient value was between 0 and -0.3 indicate no correlation between Corporate
Governance and ROE hence variables not associated.

92

The results furthers showed that Corporate Governance also had P equal 0.435 and P
equal to 0.184 with ROE and ROA at 95% confidence levels at respectively. The
relationship was tested at 95% level with a 2-tailed test where the probability value was
greater than 0.025 indicating that Corporate Governance relationship with all the two
bank performance indicators (ROE and ROA) was not significant. These findings are
contrary to Ongore and Kusa (2013) whose results indicated that management efficiency
(Corporate Governance) was positively related to the three performance ratios (ROE and
ROA). The study concluded that there was a relationship between Corporate Governance
and financial performance of commercial banks in Kenya.
Capital Requirement and Financial Performance of Banks in Kenya
From table 4.26 study findings revealed that that Capital requirement had correlation R
values of

0.905 with ROE at 95% confidence levels. This correlation coefficient is

value is between 0.7 and 1.0 indicate a strong positive linear association of capital
requirement with ROE. While relating with ROA, the Capital requirement had R values
of 0.023 at 95% confidence level. This correlation coefficient value was between 0 and
0.3 indicate no correlation between Capital requirement and ROE hence variables not
associated.
The capital requirement had at p equal to 0.905 and p equals to 0.736 with ROE and
ROA respectively. The study results relationship was tested at 95% level with a 2-tailed
test results indicated that the probability values were greater than 0.025 indicating that
capital requirement relationship with all the two bank performance indicators (ROE and
ROA) was not significant. This is contrary to Ongore & Kusa (2013) whose results
indicated that capital ratio has a negative relationship with ROE. As it was observed, the
study concluded that there was a relationship between capital requirement and financial
performance of commercial banks in Kenya.
Credit Risk Management and Financial Performance of Banks in Kenya.
From table 4.26 results revealed that that Credit risk management had R of -0.003 at
95% confidence levels with ROE. This correlation coefficient value was between 0 and
-0.3 indicate no correlation between Credit risk management with ROE hence variables
not associated. The credit risk management also has R of 0.035 with ROA at 95%

93

confidence levels. This correlation coefficient value was between 0.3 and 0.5 a weak
positive linear association.
Result further indicated that Credit risk management had p equal to 0.960 and at p equal
to 0.605 at 95% confidence levels with ROE and ROA respectively. The relationship
was tested at 95% level with a 2-tailed test and the probability values were greater than
0.025 indicating that Credit risk management relationship with all the two bank
performance indicators (ROE and ROA) was not significant. This is contrary to Ongore
and Kusa (2013) whose result indicated asset quality (Credit risk management) which is
expressed as non-performing loans to total loans is negatively related to all the three
banks performance indicators. The study concluded that there was a relationship
between Credit risk management and financial performance of commercial banks in
Kenya.
Liquidity Management and Financial Performance of Banks in Kenya
From table 4.26 results revealed that that Liquidity Management had R of 0.70 and R of
0.035 with ROE and ROA at 95% confidence levels. This correlation coefficient value
was between 0.5 and 0.7 indicating a moderate positive linear association between Liquidity
Management with ROE. While relating with ROA, the Liquidity Management had R
values of 0.048 at 95% confidence levels. This correlation coefficient value was between
0 and 0.3 indicate no correlation between Liquidity Management with and ROA hence
variables not associated
Result further indicated that Liquidity Management had p equal to 0.309 and at p equal
to 0.487 at 95% confidence levels with ROE and ROA respectively. The probability
values were greater than 0.025 indicating that Liquidity Management relationship with
all the two bank performance indicators (ROE and ROA) was not significant. These
findings were similar to Ongore and Kusa (2013) whose results indicated that Liquidity
Management was positively related to ROA, and ROE. This may be due to the fact that
Liquidity Management is more related with fulfilling depositors obligation
(safeguarding depositors) than investment. The study concluded that there was a
relationship between Liquidity Management and financial performance of commercial
banks in Kenya even though it is not significant

94

Results of the Regression Analysis

Under the following regression outputs the beta coefficient may be negative or positive;
beta indicates each variables level of influence on the dependent variable. P-value
indicates at what percentage or precession level of each variable is significant. R2 value
indicates the explanatory power of the model and in this study adjusted R 2 value which
takes into account the loss of degrees of freedom associated with adding extra variables
were inferred to see the explanatory powers of the models.
According to Mugenda and Mugenda (2003) a correlation coefficient indicates the
relationship between variables, it does not imply any causal relationship between
variables and hence the need for further statistical analysis such as regression analysis to
help establish specific nature of the relationships. In this section, multiple regression
analysis is presented for banks performance each year. In order to answer effect of
CBK regulatory requirement the proposed model on relationship effects of CBK
regulatory requirement and performance built regression
The coefficients or beta weights for each variable allowed the researcher to compare the
relative importance of each independent variable. In this study the unstandardized
coefficients and standardized coefficients are given for the multiple regression
equations. However discussions are based on the standardized coefficients. The general
model was subjected to testing using multiple regressions (stepwise method) year by
year to establish whether each CBK regulatory requirement affected banks performance.
The model is presented algebraically as follows:
In testing the hypothesis, a regression equation model was used in the form of:
ROAit =0+ CGit +1CRit + 3CRMit + 2LMit +.3.2
ROEit = 0+ CGit +1CRit + 3CRMit + 2LMit + .3.3

The variables of the study were: Performance of commercial bank expressed by ROA
and ROE; CR = Capital requirement, LM= Liquidity Management CRM= Credit risk
management, CG= Corporate Governance and = Error term (the residual error of the
regression.
Regression Results
Multiple Regression analysis

95

The dependent variable of the proposed model was financial performance of banks and
the independent variables of the study were capital requirement, Credit risk
management, and Corporate Governance and Liquidity Management. The model is
presented algebraically as follows;
ROAit =0+ CGit +1CRit + 3CRMit + 2LMit +.3.2
ROEit = 0+ CGit +1CRit + 3CRMit + 2LMit + .3.3

The variables of the study were : Performance of commercial bank expressed by ROA
and ROE , CR = Capital requirement, LM= Liquidity Management CRM= Credit risk
management, CG= Corporate Governance and = Error term (the residual error of the
regression
Regression Analysis with ROA
Table 4.27: Regression Coefficients with ROA
Coefficientsa
Unstandardized Coefficients

Model

B
(Constant)
1

Corporate Governance
Capital Requirement

Std. Error
3.429

1.182

- .005

.006

-.004

Credit Risk Management

.009
Liquidity Management
.022
a. Dependent Variable: Return on Asset for Commercial banks

Standardized
Coefficients

Beta
2.901

.004

-.066

-.935

.351

.042

-.007

-.103

.918

.027
.015

.023
.103

.333
1.467

.739
.144

The regression result presented in table 4.27 indicates corporate governance and Capital
Requirement had negative coefficient while Credit Risk Management and Liquidity
Management had positive coefficient. The coefficient are used to answer the following
regression model which relates the predictors (independent) and dependent variables
As per the SPSS generated table 4.27, the established regression equation was:
ROAit=0+1CGit+2CRit+3CRMit+4LMit+.3.2 became: ROA
=3.429 0.05*Corporate governance0.004*Capital Requirement +0.009*Credit Risk
Management+ 0.022* Liquidity Management.

96

Sig.

The regression equation above has established that taking independent variables to be
constant financial performance will be 3.429. Corporate Governance and Capital
requirement had negative coefficients of -0.005 and -0.004 respectively while Liquidity
Credit Risk Management and Management had a positive coefficient of0 .009 and 0.022
respectively. The findings presented also shows that taking other independent variables
at zero, a unit increase in capital requirement will lead to -0.004 decrease in bank
financial performance; a unit increase in Liquidity Management will lead to 0.022
increase in bank financial performance; a unit increase in Credit risk management will
led to 0.009 decrease in banks financial performance and finally a unit increase in
Corporate Governance will lead to -0.005decrease in bank financial performance. At 5%
level of significance and 95% level of confidence Corporate Governance had a 0.351
level of significance. Capital Requirement had a 0.918 level of significance while Credit
risk management had a 0.739 level of significance and Liquidity Management had a
0.144 level of significance. All coefficient values not significant because P value (Sig
value) were greater than 0.0025 testing at 95% level with 2 tailed thus these values are
more than critical values of 5% . The coefficient explains insignificant influence of
independent variable to performance of banks. This result is similar to that of Ogilo,
(2012).
Regression Analysis with ROE
Table 4.28: Regression Coefficients with ROE
Coefficientsa
Unstandardized Coefficients Standardize
d
Coefficients
B
Std. Error
Beta

Model

(Constant)
1

Corporate Governance
Capital Requirement
Credit Risk Management
Liquidity Management

28.52

3.486

-015
-.018
-.011
.034

.017
.123
.079
.044

-.064
-.010
-.010
.054

8.182

.000

-.901
-.149
-.142
.770

.369
.882
.887
.442

a. Dependent Variable: Return on Equity for Commercial banks

The regression result presented in table 4.28 indicates corporate governance and capital
requirement had negative coefficient while credit risk management and liquidity
management had positive coefficient. The coefficient are used to answer the following
regression model which relates the predictors (independent) and dependent variables

97

Sig.

As per the SPSS generated table 4.28, the established regression equation was
ROEit = 0+ CGit +1CRit + 3CRMit + 2LMit + .3.3

became:
ROE= 28.5200.15*Corporate Governance 0.18* Capital Requirement 0.11*Credit
risk management + 0.034*Liquidity Management
Table 4.28 depicts the regression coefficients for the ROE. It shows that holding
(Corporate Governance, Capital Requirement, Credit Risk Management, and Liquidity
Management) constant financial performance will be 28.520. Corporate Governance,
Capital requirement, Credit risk management and had negative coefficients of 0.15,
0.18and 0.11 respectively while Liquidity Management had a positive coefficient of
0.034. The findings presented also shows that taking other independent variables at zero,
a unit to increase in Corporate Governance will lead to 0.15 decrease in banks financial
performance in banks financial performance, Capital Requirement will lead to 0.18
decrease in banks financial performance; Credit Risk Management will lead to
0.11decrease in bank financial performance while Liquidity Management will lead to
0.034 increase in banks financial performance. At 5% level of significance and 95%
level of confidence All coefficient values for variables (Corporate Governance, Capital
Requirement Credit Risk Management and Liquidity Management with P= 0.369, 0.882,
0.887 and 0.442 level of significance a respectively ) were not significant because P
value (Sig value) were greater than 0.0025 testing at 95% level with 2 tailed thus these
values are more that critical values of 5%
Model Summary and ANOVA Test
The linear regression analysis models the relationship between the dependent variable
which is financial performance and independent variable which is effect of CBK
regulatory requirement. Coefficient of determination explains the extent to which
changes in the dependent variable (profit represented by proxy indicator ROE and ROA)
that is explained by all the four independent variables (CBK regulatory requirements
effects represented by proxy indicator of: Corporate Governance ,Capital Requirement,
Credit Risk Management and Liquidity Management). ANOVA Test and Adjusted R
square were computed as the preliminary test for multiple linear regression model

98

adopted in the study. These were used to show the significance of the regression model
adopted in the study. Table 4.29 and 4.30 shows the Model summary and the ANOVA
test respectively.
Table 4.29: Model Summary with ROE
Model

R Square

Adjusted R
Square

Std. Error of
the
Estimate

0.872 a

0. 7604

0.794

0.42747

a. Predictors: (Constant), Corporate Governance ,Capital requirement, Credit risk management, Liquidity
Management for Commercial banks

Model summary in table 4.29 shows the output for model fitness and value of adjusted R
squared was 0.794. This shows that the variables (Corporate Governance, capital
requirement, Credit risk management and Liquidity Management) tested had a variation
of 79.4% on the profitability of commercial banks in Kenya at 95% confidence
interval .The four independent variables that were studied, explain only 79.4.0% of the
effect of CBK regulatory requirement on performance of banks in Kenya as represented
by the adjusted R2. This therefore means that other factors not studied in this research
contribute 20.6% of the effects of CBK regulatory requirement uptake on performance
of commercial banks. Therefore, further research should be conducted to investigate the
other factors (20.6%) that affect financial performance of banks. R is the correlation
coefficient which shows the relationship between the study variables. The findings show
that there was a strong positive relationship between the study variables as shown by R
which is the correlation coefficient of 0.872
Table 4.30: Analysis of Variance ANOVAa with ROE

Model

Sum of
Regression
Residual
Total

ANOVAa
df
Mean Square

Squares
2.818
333.598
336.416

4
210
214

.705
1.589

1.443

Sig.

.077b

a. Dependent Variable: Return on Equity for Commercial banks

b. Predictors: (Constant), Corporate Governance, Capital requirement , Credit risk transfer and
Liquidity Management, for Commercial banks

99

In addition, the ANOVA test shown in table 4.30 was used to test the significance of the
model and to test the existence of variable variations within the model. The results of the
ANOVA test show a P-value of 0.777 is more than the set level of significance of 0.05
for a normally distributed data. The results further revealed that the model had an F-ratio
of 0.443 which was not significant at 1% level of significance. This result indicates that
the overall regression model is statistically not significant and is useful for prediction
purposes at 10% significance level. This further indicates that the independent variables
used (capital requirement, Liquidity Management Credit risk management and
Corporate Governance) are statistically significant in predicting profitability of
commercial banks.
Table 4.31: Model Summary with ROA
Model

R Square

Adjusted R
Square

Std. Error of
the
Estimate

0.872 a

0. 7604

0.794

0.42747

a. Predictors: (Constant), Corporate Governance, Capital requirement, Credit risk management, Liquidity
Management for Commercial banks

Model summary in table 4.31 shows the output for model fitness and value of adjusted R
squared was 0.794. This shows that the variables (Capital Requirement, Liquidity
Management Credit risk management and Corporate Governance) tested had a variation
of 79.4% on the profitability of commercial banks in Kenya at 95% confidence interval.
R is the correlation coefficient which shows the relationship between the study variables,
from the findings shown in the table 4.31 there was a strong positive relationship
between the study variables as shown by 0.872. The four independent variables that
were studied, explain only 79.4.0% of the effect of CBK regulatory requirement on
performance of banks in Kenya as represented by the adjusted R2. This therefore means
that other factors not studied in this research contribute 20.6% of effects of CBK
regulatory requirement uptake on performance of commercial banks. Therefore, further
research should be conducted to investigate the other factors (20.6%) that affect
financial performance of banks.

100

Table 4.32: Analysis of Variance - ANOVAb with ROA

ANOVAa

Model

Sum of
Regression
Residual
Total

Squares
.687
38.373
39.060

df

Mean Square
4
210
214

.172
.183

F
.940

Sig.
.442b

a. Dependent Variable: Return on Asset for Commercial banks

b. Predictors: (Constant), Corporate Governance, Capital requirement , Credit risk transfer and
Liquidity Management, for Commercial banks

From the ANOVA statistics in table above, the processed data, which is the population
parameters, had a P-value of 0.0442 which was more than the set level of significance of
0.05 for a normally distributed data. The results further revealed that the model had an
F-ratio of 0.940 which was not significant at 1% level of significance. This result
indicates that the overall regression model is statistically not significant and is useful for
prediction purposes at 10% significance level. This further indicates that the independent
variables used (capital requirement, Liquidity Management Credit risk management and
Corporate Governance) are not statistically significantly in predicting financial
performance (ROA) of commercial banks in Kenya .
Test of Hypotheses
To draw inferences about the population of the sampled data was study used a
regression model, T -test is widely adopted for hypothesis testing, which is introduced
by William Sealy Gosset. This test-of-significance method is to verify the truth or falsity
of a null hypothesis by using sample results, showing that the means of two normally
distributed populations are equal. As a result, the key idea behind tests of significance is
that of a test statistic (estimator) and the sampling distribution of such a statistic under
the null hypothesis (Gujarati, 2004). In the case oft-test, t distribution is used, and a
statistic is considered to be statistically significant if the value of the test statistic lies in
the critical region, in which case the null hypothesis is rejected. The test could either be
one-tail or two-tail. When the alternative hypothesis is composite rather with a certain
direction, the test will be made two-tail or two-side.

Very often such a two-side

alternative hypothesis reflects the fact that there is no strong priori or theoretical
expectation about the direction in which the alternative hypothesis should move from the
null hypothesis. There were five types of relationships to be tested using one-way

101

analysis of variance (ANOVA). In all the tests, the decision rule was if the P value
observed (calculated P) is less than the set alpha () that is the confidence level of 0.05,
then reject the null hypothesis and if the P value observed is greater than the set alpha of
0.05, do not reject the null hypothesis. The testing of these hypotheses was done at level
of significance of 0.05.
The model is presented algebraically for ROE and ROA respectively. The following
regression result shows the effects of CBK regulatory requirement on financial
performance of commercial banks in Kenya are as follows
ROAit =0+ 1CGit +2CRit + 3CRMit + 4LMit +.3.2
ROEit = 0+ 1CGit +2CRit + 3CRMit + 4LMit + .3.3

. The objective of this study was to answer how Corporate Governance, Capital
Requirement,

credit risk management and Liquidity Management affect the

performance of commercial banks in Kenya or not. At the outset it was hypothesized that
bank specific factors significantly affect the performance of commercial banks. Thus,
the hypothesis was that Corporate Governance, Capital Requirement, Credit risk
management and Liquidity Management affects the performances of commercial banks
in Kenya.
Table 4.33 Regression output using ROA
Coefficients
Unstandardized

Coefficients
t-Statistic
Standardized

Model

Beta

Constant)

1.237852
(3.468773)*
0.000177
(0.091713)NS

Corporate Governance

Std.
Error
1.799

36.700 -.061

Sig.

3.407

.002

- 1.277

.210

Capital requirement

0.035082
.041
(2.836691)**

-.163

- 3.582

.001

Credit risk Management

-0.097720
(-12.91408)*

.073

-.038

-.744

.462

-0.097720
(-12.91408)*

18.167 .012

.274

.786

Liquidity Management

102

R2

0.638823

Adjusted R2
N

0.632853
215

Method: GLS (Cross Section Weights)

Note The figures in parentheses are t-Statistics
* Statistically significant at the 1% level
** Statistically significant at the 5% level
*** Statistically significant at the 10% level
NS Statistically

Table 4.34 Regression output using ROE

Unstandardized

Coefficients
Standardized
B

Constant

Coefficients

t-Statistic

Sig.

3.050

.004

Std.
Error
2.759

Beta

0.193528
(7.362248)*

57.032

-.123

- 1.716

.09

-0.350220
(5.922229)*

5.616

-.214

-3.011

.005

103

-.060

-.766

.449

32.493

.040

.566

.575

13.93189
(6.317538)*

Corporate Governance
Capital requirement

Credit
Management

Management

risk -0.319185
(7.915126)*
Liquidity 0.005010
(0.698608)NS

Adjusted R2

0.632853

215

Method: GLS (Cross Section Weights)

Note The figures in parentheses are t-Statistics
* Statistically significant at the 1% level
** Statistically significant at the 5% level
*** Statistically significant at the 10% level
NS Statistically

H01: There is no significant effect between Corporate Governance and financial

performance of commercial banks in Kenya.
From the above findings there is no significant relationship with the performances of
commercial banks (p=0.210; p=0.09) a minimum of 95% confidence level. The above

103

results thus leads to the acceptance of Hypothesis H04 that there is no significant effect
between Corporate Governance and financial performance of commercial banks
H02: Capital requirement has no significant effect on the financial performance of
commercial banks in Kenya.
As presented in Table 4.33 and 4.34, capital requirement had a significant relationship
( p=0.005 ;p=0.005) with the performances of commercial banks at a minimum of 95%
confidence level with ROA and ROE respectively. Based on these results of Hypothesis
H01 (capital requirement has no significant effects on the financial performance of
commercial banks in Kenya) was acceptance because it fall on acceptance region . By
accepting the null hypothesis the results indicated that capital requirement has capital
requirement has no significant effects on the financial performance of commercial banks
in Kenya.
H03: There is no significant effect between Credit risk management and financial
performance of commercial banks in Kenya.
As it presented in Table 4.33 and 4.34, Credit risk management had no significant
relationship with the performances of commercial banks (p=462; p=0.449) with a
minimum of 95% confidence level. The above results thus lead to the rejection of
Hypothesis H03; there is no significant relationship between Credit risk management and
financial performance of commercial banks in Kenya. The results also showed that it
was negatively related with bank financial performance. By rejecting the null hypothesis
the results indicated that there is significant effect between credit risk management and
financial performance of commercial banks in Kenya.
H04: Liquidity Management has no significant effect on the financial performance
of commercial banks in Kenya.
As presented in table 4.33 and 4.34, Liquidity Management had a significant relationship
with the performances of commercial banks (p=786; p=0. 575) at minimum of 95%
confidence level with ROA and ROE respectively. The above results thus leads to the
acceptance of Hypothesis H02 that liquidity Management has no significant impact on
the financial performance of commercial banks in Kenya. The results lead to acceptance
of null hypothesis that liquidity Management has no significant effects on the financial
performance of commercial banks in Kenya.
Bank ownership

104

Dummy variables, Local and foreign owned (LO, and FO) were introduced to measure
bank ownership during implementation of the prudential regulations. In order to gain an
in-depth understanding of the current ownership structure in terms of share percentage
of the banks under study and whether the share percentage had changed with time. The
researcher asked respondents to indicate the percentage of shares owned by the state for
state owned banks, managers, workers, and domestic individuals, institutional and
foreign investors. In the banks surveyed, though the state still had majority shares of
over 70% in state-owned banks, from the findings it was evident that the state was
slowly withdrawing from active participation in some banks by periodically offloading
shares as some respondents noted. This may be seen as one way of encouraging other
participants in owning some of its institutions hence in line with the privatization
process that the government started way back in the 90s. In locally-owned banks and
foreign banks, share ownership varied. At least managers and workers held between 0
5 percent of the shares each in local banks as 20% of respondents in the study noted
while in foreign-owned banks employees owned up to 20% of the shares. For domestic
individual investors, domestic institutional investors and foreign investors each owned
up to 25% of shares. This can be termed as a move to encourage ownership of firm to
other investors who are not really the owners.
Test for Moderating effect
Moderator variables influence the relationship between dependent variable and other
independent variables. The direction and the magnitude of the relationship between the
dependent variable and the independent variable is dependent on the value of a
moderator (Saunders, Lewis and Thornhill, 2009). The study objective was to assess the
moderating of bank ownership has on the relationship between effects of CBK
regulatory and financial performance of commercial banks in Kenya. In this study,
ownership identity was hypothesized to be a moderator affecting the relationship
between dependent (financial performance) and the independent variables (corporate
governance, capital requirement, credit risk management and liquidity management ) for
purpose of testing moderating effect ownership identity was given in two categories
(1=Domestic 0=Foreign)
The null hypothesis (H05) was that bank ownership does not significantly moderate the
relationship between effects of CBK regulatory and financial performance of

105

commercial banks in Kenya. In order to achieve this objective the researcher first tested
whether the paths between the independent variables and the dependent variable,
between the independent variables and the mediator and between the mediator and the
dependent variable, were statistically significant. By specifying a model with return on
asset as the dependent variable, the study tested whether Corporate governance (CG),
capital requirement (CR), credit risk management and liquidity management (LM) have
statistical significant relationships with bank ownership. The regression results are
presented in table 4.39.
The model is presented algebraically with ROA and ROE as follows;
ROAit=0+1CGit*M+1CRit*M+3CRMit*M+4LMit*M +.3.4
ROEit = 0+ 1CGit*M +1CRit*M + 3CRMit*M + 4LMit*M + ..3.5

The final objective was of this study was to assess the moderating effects of bank
ownership on the relationship between the effects of CBK regulatory requirement and
financial performance of commercial banks in Kenya. Table 4.28 presents the output of
the regression analysis after being moderated by the ownership identity

106

Table 4. 35 Regression output as Moderated by Ownership Identity with ROA

Unstandardized

Coefficients
Standardized
B

Constant

Corporate Governance*M

2.750498
(21.46610)*
0. 021322
(5.277492)*

Coefficients

t-Statistic

Sig.

3.050

.004

Std.
Error
2.759

Beta

57.032

-.123

- 1.716

.09

Capital requirement*M

0.023615
5.616
(1.750640)***

-.214

-3.011

.005

Credit risk management*M

-0.098470
(-11.95253)*

103

-.060

-.766

.449

Liquidity Management*M

0.000597
(0.294329)NS

32.493

.040

.566

.575

Observation

215

R2

0.603411

Adjusted R2

0.596856

Method: GLS (Cross Section Weights); Moderating Variable (M): (Domestic=1 and Foreign=0)
Note: The figures in parentheses are t-Statistics.
* Statistically significant at the 1% level
** Statistically significant at the 5% level
*** Statistically significant at the 10% level
NS Statistically not significant

107

Table 4.36 Regression output as Moderated by Ownership Identity with ROE

Unstandardized

Coefficients
Standardized
B

Sig.

3.050

.004

Beta

5.616

-.214

-3.011

.005

32.493

.040

.566

.575

-0.301026
(-7.256684)*

103

-.060

-.766

.449

0.108693
(4.258493)*

57.032

-.123

- 1.716

.09

Observation

215

R2

0.538308

Adjusted R2

0.530676

20.74453
(21.22354)*

Capital requirement*M

-0.383483
(-6.477354)*

Liquidity Management*M

0.010157
(1.432545)NS

Corporate Governance*M

t-Statistic

Std.
Error
2.759

Constant

Credit risk management*M

Coefficients

Method: GLS (Cross Section Weights); Moderating Variable (M): (Domestic=1 and Foreign=0)
Note: The figures in parentheses are t-Statistics.
* Statistically significant at the 1% level
** Statistically significant at the 5% level
*** Statistically significant at the 10% level
NS Statistically not significant

As it can be observed from the summary of regression output in table 4.35 and 4.36, the
moderating role of bank ownership was not strong. That means there is no significant
difference on the coefficients of parameters after being moderated by the ownership
identity. Moreover, as indicated in 4.35 and 4.36, the R2 and Adjusted R2 decreased in
magnitude after being moderated. Thus, the regression analysis results showed that
hypothesis H05 can be accepted that the bank ownership has no moderating effect on the
relationship between effects of CBK regulatory requirement and financial performance
of commercial banks in Kenya. This is similar to and consistent with the findings of
Athanasoglou et al., (2005) about the Greek banks that the ownership status appeared to
be insignificant in affecting the profitability of banks. Ongore and Kusa (2013) also

108

reported the same results after examining the determinants of financial performance of
commercial banks in Kenya the in year 2001 to 2010. Thus, it can be conclude that
ownership identity didn't moderate the relationship between banks performance and
CBK regulatory requirement in Kenya.
Table 4.37 Coefficients of Determination before and after Moderation
PREDICATORS

MODEL 1
(ROA)

MODEL 2
(ROE)

Corporate Governance

0.032879

0.193528

Capital requirement

0.035082

-0.350220

Credit risk management

-0.097720

-0.319185

Liquidity Management

0.000177

0.005010

R2

0.638823

0.567085

Adjusted R2

0.632853

0.559929

Corporate Governance*M

0.021322

0.108693

Capital requirement *M

0.023615

-0.383483

Credit risk management*M

-0.098470

-0.301026

Liquidity Management*M

0.000597

0.010157

R2

0.603411

0.538308

Adjusted R2

0.596856

0.530676

Observation
Change in R2

215
-0.035412

215
-0.028777

In Adjusted R2

-0.035997

-0.029253

Individual Determinants (Non-moderated)

As it can be seen from Table 4.37 bank ownership has no significant moderating effect
on the relationship between the financial performance and its determinants. As it can be
observed from the correlation coefficients and coefficients of determination of the

109

regression outputs before and after moderation, it was found that ownership identity has
no significant moderating effect.

4.4 Discussion of Regression Results

The study sought to establish the effects of CBK prudential regulations on the financial
performance of commercial banks in Kenya. In the year 2001 to 2006 the study found
that greater variation in financial performance of commercial banks was due to changes
in Corporate Governance, capital requirement, credit risk management and Liquidity
Management. The study further revealed there was a strong relationship between the
study variables such as corporate governance, capital requirement; credit risk
Management and Liquidity Management were significantly influencing financial
performance of commercial banks in Kenya. The study also found that corporate
governance, capital requirement; credit risk management and liquidity management
were positively related to financial performance of commercial banks.
The study found that there were small changes on financial performance of commercial
banks due to changes in Corporate Governance, Capital requirement, Credit Risk
Management and Liquidity Management. This is an indication that Corporate
Governance, Capital requirement, Credit Risk Management and Liquidity Management
slightly influenced the change in financial performance of commercial banks in Kenya.
After the introduction of CBK prudential regulations of 2006, the study revealed that
there was great variation on the financial performance of commercial banks due to
changes in Corporate Governance, Capital requirement, Liquidity Management, Credit
Risk Management. The adjusted R squared value was found to be greater than that of the
period before the introduction of the prudential regulations. This is an indication that
CBK prudential regulations of 2006 resulted to Corporate Governance, Capital
requirement, credit risk management and Liquidity Management greatly influencing the
financial performance of commercial banks.
The study further revealed that corporate governance, capital requirement, credit Risk
Management and Liquidity Management were significantly influencing financial
performance of commercial banks in Kenya. The study further revealed that after the
prudential CBK regulation there was greater change in financial performance of

110

commercial banks due to change in Corporate Governance, Capital Requirement, Credit

Risk Management and Liquidity Management. These findings concur with the findings
of Stiglitz (2001) who noted that all the arguments that support the application of
regulation to banks are naturally extended to nonbanks. However, the extent and nature
of the regulation may differ markedly between banks and non-banks depending on the
role the latter institutions play in the economy.
Obiero (2002) who identified ineffective board and management malpractices as the
most dominant reasons for bank failure further noted that although the legal provisions
of the banking regulatory framework is fairly comprehensive in coverage and adequate
in content to reduce probability of failure, timely intervention by CBK is important if
they are to be effective. The research findings are also consistent with arguments that
support MFI regulation especially protection of depositors meant to contribute to the
stability and public confidence on the financial system and the need to open up or leave
alone different tiers of MFIs serving different markets niches (Hardy et al., 2003; Steel
and Andah, 2003).

111

CHAPTER FIVE

SUMMARY, CONCLUSIONS AND RECOMMENDATIONS

5.1 Introduction
From the analysis the following discussions, conclusion and recommendations were
made. The conclusion and recommendations were based on the objectives of the study.
This is a concluding chapter on preceding chapters along with the results of all empirical
studies. First, focus is on the summary of the findings and hypotheses confirmation as
derived from this thesis by referring to the research proposition. Furthermore, policy and
further study recommendations which should be of interest to both management and
policy makers are covered. Suggestions for further study are also captured as a way of
filling the gaps identified in the study.
5.2 Summary Of Findings
Earlier research notwithstanding the scarcity of studies in this area and especially in the
banking sector indicated that there are mixed results on the effects that CBK regulatory
requirement had on financial performance within the banking industry in Kenya. The
study sought to establish the effects of CBK prudential regulations on the financial
performance of commercial banks in Kenya. In the year 2009 to 2013 the study found
that greater variation in the financial performance of commercial banks was due to
changes in corporate governance, capital requirement, credit risk management and
liquidity Management. The study further revealed there was a strong relationship
between the study variables the study also found that capital requirement, Liquidity
management credit risk management and corporate governance were significantly
influencing financial performance of commercial banks in Kenya. The study also found
that corporate governance, capital requirement, credit risk management and liquidity
management were positively related to financial performance of commercial banks. The
study found that there was a small change on financial performance of commercial
banks due to changes in corporate governance, capital requirement, credit risk
management and liquidity management this is an indication that corporate governance,

112

capital requirement, credit risk management and liquidity management slightly

influenced the change in financial performance of commercial banks in Kenya.
After the CBK prudential regulations on the study revealed that there was great variation
on the financial performance of commercial banks due to changes in Corporate
governance, capital Requirement, credit risk management and liquidity management The
adjusted R squared value was found to be greater than that of before CBK prudential
regulation an indication that CBK prudential regulations resulted to Corporate
governance, capital requirement, credit risk management and liquidity management
greatly influencing the financial performance of commercial banks. The study further
revealed that Corporate Governance, Capital Requirement, Credit Risk Management and
liquidity management were significantly affect financial performance of commercial
banks in Kenya. The study further revealed that after the prudential CBK regulation
there was greater change in financial performance of commercial banks due to change in
corporate governance, capital requirement, credit risk management and liquidity
Management.
5.3 Conclusions
The study revealed that there was great variation on the financial performance of
commercial banks due to changes in corporate governance, capital requirement , Credit
risk management and liquidity Management. This is an indication that CBK prudential
regulations had great effects on the financial performance of commercial banks. This
empirical study showed that the impact of foreign ownership in the sector was positive
(0.004) but not statistically significant (0.215). The results were almost the same in all
samples indicating that foreign ownership is not a critical factor of profitability in the
sector and as such a public policy to encourage the presence of foreign banks. Therefore,
not yield any advantage in terms of bank profitability. This finding is diametrically
against the argument that foreign banks bring with them better know-how and technical
capacity, which then spills over to the rest of the banking system and thus improve
profitability (Kiruri, 2013; Kamau, 2009). Flamini et al., (2009) obtained similar results
and they concluded that foreign-owned banks face the same local conditions as local
banks, with regard to risk and the performance of the domestic economy.

113

5.4 Recommendations
The following policy recommendations were proposed to improve the overall
management of Commercial Banks in Kenya. Firstly, on average capital ratio of
Commercial Banks in Kenya the study recommends that commercial bank management
should leverage volatile earnings and this also affects the credit creation and liquidity
function of the bank and bank managers who invest their liquid assets can generate
income and boost their performance. Secondly, commercial banks should also check
their credit policy and practices. Commercial banks should also try to keep their
operational cost low as this negates their profits margin thus leading to low financial
performance. Without causing injury to any independent operation, elimination of
internal policy barriers should be addressed by respective institutions but in cases of
failure demand shifts should only be caused by prevailing market forces. The CBK
should delegate responsibilities on credit rating and information sharing which should be
formed, backed by legalization and sufficient resource endowment, to frequently feed
commercial banks on eminent risk and proposal on avoidance or reduction. Thirdly, the
regulator and banks unions should interface to design most applicable and convenient
loan management protocols in the industry that considers shortening of long channels
and discourages extra costs on the loan facility. Lastly, shareholders need to know that
they have an important role in ensuring that the banks management are following and
implementing good corporate governance. They can do this through establishing certain
control means thus undertake the monitoring process. Finally Commercial bank
stakeholders should play a more active role in ensuring good corporate governance in
corporations.
5.5 Areas For Further Research
This study did not include everything and a further study is recommended to include
CBK regulatory requirement and their influence on the financial performance of
institution. The researcher recommends that future research should be directed towards
validating the results of this study by conducting a similar research in micro-finance in
Kenya by collecting data from different sources.

114

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LIST OF APPENDICES
Appendix i: Letter Of Authorization
To
Managing Director
Name of the Bank..
P.O. Box
Dear Sir/Madam,
Subject:

RESEARCH DATA ON EFFECT OF CBK REGULATORY

REQUIREMENT ON FINANCIAL PERFORMANCE OF COMMERCIAL

BANKS IN KENYA.
I am a student pursuing a Doctorate Degree in Business Administration- Finance Option
at Jomo Kenyatta University of Agriculture and Technology. I am student undertaking a
research thesis as partial fulfillment for the award of this higher degree. My research
topic is stated above and i kindly request for your assistance in making my research a
success. The purpose of this letter is therefore to request you to grant me permission to
collect relevant data from your organization using selected respondents among your
management staff. The information collected will be treated with utmost confidentiality
and will be used for academic purposes only.
Thank you in advance for your time and cooperation.
Yours Sincerely
Paul MuneneMuiruri
Student Reg No. HD433/1754/2012

122

Appendix ii: Letter Of Introduction

Date
To.
..
Dear Sir/Madam,
RE: COLLECTION OF RESEARCH DATA
My name is Paul Munene and a PhD student in Business Administration Finance
option at Jomo Kenyatta University of Agriculture and Technology. Currently, I am
carrying out a research on the Effects of CBK regulatory requirement on financial
performance of commercial banks in Kenya. I am in the process of gathering relevant
data for this study. You have been identified as one of the collaborators and respondents
in this study. I request for your assistance towards making this study a success. I
therefore kindly request you to take some time to respond to the attached questionnaire. I
wish to assure you that your responses will be treated with confidentiality and will be
used solely for the purpose of this study.
It will be appreciated if you can fill the questionnaire within the next 5days to enable
early finalization of the study.
Thank you in advance
Yours Sincerely
Paul MuneneMuiruri
Student Reg No. HD433/1754/2012

123

Appendix iii: Study Questionnaire

This questionnaire seeks to investigate the effects of CBK regulatory requirement on
financial performance of commercial bank. This study is an academic study and the
information obtained through this questionnaire will be treated confidentially and will
not be used for any other purpose other than academic research.
Date: ____________________ Questionnaire No: ____________
Part I: Respondents Information
1. Name of Organization
2. Please state your position/Department you come from
3. Kindly indicate number of years you have worked in this bank
Less than 1 year [ ] 1- 5 years [ ] 6 10 years [ ] Over 10 years [ ]
4. What is your highest level of education you have attained?
Diploma [ ] Bachelors degree [ ]

Masters degree [ ] PhD/Doctorate

[ ]

5. Is your institutions were listed on the Nairobi Stock Exchange (NSE)?.

Yes [

NO [

Part 2: The effects of CBK regulatory requirement on commercial Bank In Kenya

5. How would do you regard your knowledge of CBK regulatory requirement?
Excellent [ ] Very good

[ ] Good [ ] Adequate [ ] Inadequate [ ]

6.0 Kindly indicate number of Directors in the Board who represent the Controlling
Group
13[

4 6[

]79

13 and over [

7.0 How would you classify your organization in regard to ownership?

Locally owned [

Foreign owned[

Combination of local and foreign[

]
Other Please specify [

__________________________________________________

Bank Performance

124

Please respond to the following statements by ticking in the appropriate box

Corresponding to each statement.
Strongly

Agree

Agree

Neither Agree

Disagree

nor disagree

Disagree
Strongly

Bank performance
The bank has good improvement
of return on equity in the last
three years
The bank has good improvement
of return on assets in the last
three years
The firm has better return on
equity than industry average
(benchmarks)
The firm has better return on
assets than industry average
(benchmarks)

Effects of CBK regulatory requirement on financial performance

Strongly
Agree
1. Corporate governance
The bank has a clear list of the share owned
by members of the BoD
The firm publishes and distributes its
financial results and management analysis
The audit section of the firm is performing its
duties as expected
The firm provides equal access to
information for shareholders and investment
analysts
The bank regularly holds self-assessment of
good corporate governance
There are any potential conflicts of interest
between the bank and the member of its BoD
The bank has well written Corporate
Governance (Policies; e.g. which covers
specification on BoDs duties, disclosure
rules, shareholders rights etc. Revealed code
of conduct/ethics clearly)
Shareholders rights and responsibilities are
well adhered to; e.g. rights to vote, 28 days

125

Agree

Neither Agree
nor disagree

Disagree

Disagree
Strongly

notice of their meetings, etc.

The bank regularly holds self-assessment of
good corporate governance
2. Capital requirements

Strongly

Agree

Agree
Capital requirement is one

Neither Agree

Disagree

nor disagree

Disagree
Strongly

of effects of

CBK regulatory requirement on financial

performance
Transfer of ownership influences bank
performance
Capital requirement structure of banks is
highly regulated
High capital requirement in banks leads to
low profits
Bank is able to supervise ,oversight their
system to compute minimum capital
requirements.
In this bank there is policy concerning
definition of capital requirement beyond cash
or government security whether regulator
and supervisory authorities verify source
capital or not
3. Credit risk Management

Strongly

Agree

Agree
Credit risk Management is one

Neither Agree

Disagree

nor disagree

Disagree
Strongly

of effects

of CBK regulatory requirement on financial

performance
Credit risk Management affects financial
performance of our bank
Improving bank supervision and bank risk
management enhances bank performance
Profitability of our bank is influenced by
bank risk management
Capital requirement reduces bank credit risk
4. Liquidity management

Strongly
Agree

Liquidity management is one

of effects of

CBK regulatory requirement on financial

performance
Liquidity management affects financial
performance of our bank
Customer deposit tom total asset and

126

Agree

Neither Agree
nor disagree

Disagree

Disagree
Strongly

customer deposit is used as financial ratio to

measure our bank liquidity
It is important for CBK to ensure full
compliance with minimum liquidity
requirement

THANK YOU FOR YOUR TIME AND PATIENCE

127

Appendix iv: Secondary Data Collection Sheet

Part 1: FINANCIAL PERFORMANCE
1. Kindly indicate the following figure for your bank in years specified.
a) Return on Assets
Profitability measurement

2009

2010

2011

2012

2013

Net income
Total Asset
Return on Assets (ROA)=Net Income/Total Asset

b) Return on Equity
Profitability measurement

2009

2010

2011

2012

2013

Net income
Total Equity
Return on Equity(ROE)=Net Income/Total Equity

Part 4: THE EFFECTS OF CBK REGULATORY ON FINANCIAL PERFORMANCE

a) Corporate Governance
Corporate Governance

2009

2010

2011

2012

2013

measurement
Total Operating Revenue to Total Profit
Total Profit
FS= Total Operating Revenue / Total Profit

b) Capital requirement
Capital requirement

2009

2010

measurement
Total equity
Total liabilities

128

2011

2012

2013

Total asset
CAR = total Equity/Total Asset

c) Credit risk management

Credit risk management

2009

2010

2011

2012

2013

Measurement
Total Loans
Total Non-performing loans
Total asset
Cr =Non-performing loans / total loans

d) Liquidity Management
Liquidity Management measurement

2009

2010

Total Loans
Total Customer Deposit
Total asset
BL = Total Customer Deposit/total loan

129

2011

2012

2013

Appendix v: Ranking of Commercial Banks in Kenya

BANK
CLASSIFICATION
Tier I

DESCRIPTION
Comprises of banks with
anasset base of more than
Kes.40 billion.

COMMERCIAL BANKS
1.
2.
3.
4.

Citibank
Equity Bank
Standard Chartered Bank
Commercial
Bank
of

Africa
5. Barclays Bank of Kenya
6. NIC Bank
7. Kenya Commercial Bank
8. National Bank of Kenya
9. Diamond Trust Bank
10. Co-operative Bank of

Tier II

Comprises of banks with

an asset base of less than
Kes.40 billion but more
than Kes. 10 billion

Tier III

Comprises of banks with

an
asset base of less than
Kes.
10 billion.

Kenya
11. CFC Stanbic Bank
1. I&MBank
2. Bank of India
3. Bank of Baroda
4. Family Bank
5. Imperial Bank
6. Prime Bank
7. Bank of Africa
8. Chase Bank
9. FinaBank
10. EcoBank
11. HFCK
1. Habib A.G. Zurich
2. Victoria Commercial Bank
3. Credit Bank
4. Habib Bank (K) Ltd
5. Oriental Commercial Bank
6. K-RepBank
7. ABC Bank
8. Development Bank of
Kenya
9. Middle East Bank
10. Equatorial
Commercial
Bank
11. Trans-National Bank
12. . Dubai Bank
13. Fidelity Commercial Bank
14. City Finance Bank
15. Paramount Universal Bank

130

16. Giro Commercial Bank

17. Consolidated Bank
18. Guardian Bank
19. Southern Credit Bank
20. Gulf African Bank
21. First Community Bank
22. Eco Bank
23. Chase Bank
24. United Bank of Africa
Source: CBK, 2012

131

Appendix vi: List Of Investment Banks In Kenya

1. ABC Capital
2. African Alliance Kenya Investment Bank
3. Afrika Investment Bank
4. Apex Africa Capital
5. CBA Capital
6. Discount Securities (Under Statutory management)
7. Dyer & Blair Investment Bank
8. Equity Investment Bank
9. Faida Investment Bank
10. Francis Drummond & Company
11. Genghis Capital
12. Kestrel Capital
13. Kingdom Securities
14. Ngenye Kariuki& Co (Under Statutory management)
15. NIC Securities
16. Old Mutual Securities
17. Renaissance Capital (Kenya)
18. SBG Securities
19. Standard Investment Bank
20. Sterling Capital
21. Suntra Investment Bank

Appendix vii : Secondary data

Bank

Year

Net Interest

Return On

Return On

Capital

Liquidity

Credit risk

Corporate

Ecobank Kenya Ltd

Guaranty Trust Bank Ltd
Dubai Bank Ltd
Trans - National Bank Ltd
First Community Bank Ltd
CFC Stanbic Bank (K) Ltd
Diamond Trust Bank (K) Ltd
I&M Bank Ltd
NIC Bank Ltd
National Bank of Kenya Ltd
Prime Bank Ltd
Housing Finance Co. of

2009
2009
2009
2013
2013
2009
2009
2009
2009
2009
2009
2009

Margin
6.50
6.50
6.50
6.70
6.90
7.00
7.00
7.00
7.00
7.00
7.00
7.00

Asset
30.00
29.00
30.00
29.00
30.90
28.00
29.00
30.00
28.00
29.00
29.00
30.00

Equity
3.00
4.00
4.00
3.90
3.70
4.70
3.00
4.00
4.00
3.00
4.00
4.00

requirement
22.80
21.00
21.00
21.00
21.00
21.00
21.00
22.00
23.00
21.00
21.00
21.00

Management
39.50
40.00
41.00
40.00
38.00
38.00
37.00
37.00
37.50
38.00
39.00
38.00

management
8.00
6.00
5.00
5.00
7.00
7.00
6.00
7.00
5.00
4.40
6.00
4.70

Governance
50.00
56.00
50.00
56.00
56.00
51.00
45.00
55.00
50.00
51.00
50.00
56.00

Kenya Ltd
Citibank N.A. Kenya
Chase Bank Ltd
Bank of India
CFC Stanbic Bank (K) Ltd

2009
2009
2009
2010

7.20
7.20
7.00
7.00

28.00
30.00
30.00
29.00

3.00
4.00
4.00
4.00

22.00
21.00
22.00
21.00

39.00
39.50
39.00
40.00

5.00
6.00
7.00
6.70

50.00
55.90
51.00
55.00

132

NIC Bank Ltd

Citibank N.A. Kenya
Gulf African Bank Ltd
Guardian Bank Ltd
Habib Bank A.G. Zurich
Paramount Universal Bank

2010
2010
2011
2011
2011
2012

7.00
7.00
7.00
7.00
7.00
7.00

27.00
30.00
28.00
30.00
29.00
30.00

4.00
4.00
3.00
4.70
3.00
4.20

21.70
22.00
21.00
22.00
21.00
21.00

43.00
43.00
39.00
44.00
38.00
44.00

5.00
7.00
6.00
7.00
6.00
5.00

47.00
51.00
46.50
51.00
50.00
50.00

Ltd
Trans - National Bank Ltd
First Community Bank Ltd
Housing Finance Co. of

2013
2013
2013

6.70
6.90
7.00

29.00
30.90
29.30

3.90
3.70
3.50

21.00
21.00
21.00

40.00
38.00
41.00

5.00
7.00
4.40

56.00
56.00
56.00

Kenya Ltd
Ecobank Kenya Ltd
African Banking Corporation

2013
2013

7.00
7.00

30.30
29.50

4.00
4.00

21.00
22.00

40.00
40.00

6.00
4.70

56.00
50.00

Ltd
Gulf African Bank Ltd
Equatorial Commercial Bank

2013
2013

7.00
7.00

29.00
30.00

4.00
4.00

21.00
21.00

41.00
39.50

6.00
7.00

56.00
56.00

Ltd
Giro Commercial Bank Ltd
Consolidated Bank of Kenya

2013
2013

7.00
7.00

30.40
28.00

4.00
4.00

21.00
21.00

40.00
39.00

4.70
4.70

56.00
51.00

Ltd
K - Rep Bank Ltd
Guardian Bank Ltd
Fidelity Commercial Bank

2013
2013
2013

7.00
7.00
7.00

30.00
30.00
29.00

3.80
3.90
3.50

21.00
21.00
21.00

41.00
39.00
40.00

4.70
7.00
8.00

56.00
50.00
56.00

Ltd
Dubai Bank Ltd
I&M Bank Ltd
Jamii Bora Bank Ltd
Bank of Baroda (K) Ltd
Ecobank Kenya Ltd
Habib Bank Ltd
UBA Kenya Ltd
Middle East Bank (K) Ltd
Bank of Africa (K) Ltd
Family Bank Ltd
Imperial Bank Ltd
Gulf African Bank Ltd
Commercial Bank of Africa

2013
2010
2013
2009
2010
2011
2012
2010
2009
2009
2009
2009
2009

7.00
7.20
7.20
7.30
7.50
7.50
7.50
7.80
8.00
8.00
8.00
8.00
11.00

29.70
29.00
29.50
28.00
30.00
27.00
27.00
30.50
29.00
27.00
28.00
26.00
27.00

3.90
4.00
3.90
4.00
4.70
4.50
4.00
4.00
4.00
4.00
4.00
4.00
4.70

21.00
21.00
21.00
21.00
22.00
22.00
21.00
22.00
22.00
22.00
23.00
21.00
22.00

43.00
44.00
39.00
37.50
44.00
40.00
40.00
44.00
38.00
39.50
37.50
38.00
43.00

5.00
6.50
5.00
7.00
7.00
4.70
4.50
6.00
8.00
7.00
5.00
5.00
8.00

56.00
46.00
56.00
40.10
45.00
51.00
53.70
40.10
55.00
51.00
50.00
51.00
40.10

Ltd
African Banking Corporation

2009

11.00

27.00

3.00

22.00

37.50

7.00

50.00

Ltd
Equatorial Commercial Bank

2009

11.00

30.00

4.00

22.10

37.50

4.70

56.00

Ltd
Giro Commercial Bank Ltd
Victoria Commercial Bank

2009
2009

11.00
11.00

29.50
28.00

4.70
4.70

22.50
21.00

38.00
38.70

4.40
5.00

40.10
40.90

Ltd
Consolidated Bank of Kenya

2009

11.00

29.00

4.00

22.00

39.50

6.00

41.00

Ltd
Development Bank of Kenya

2009

11.00

28.00

4.70

21.00

40.00

7.00

46.00

Ltd
K - Rep Bank Ltd
Guardian Bank Ltd
Fidelity Commercial Bank

2009
2009
2009

11.00
11.00
11.00

30.00
30.00
30.00

4.00
4.00
4.00

21.50
22.50
21.00

40.80
44.00
43.70

8.00
6.00
7.00

47.00
50.00
51.00

Ltd
Habib Bank A.G. Zurich
First Community Bank Ltd
Trans - National Bank Ltd
Credit Bank Ltd
Middle East Bank (K) Ltd
UBA Kenya Ltd
Paramount Universal Bank

2009
2009
2009
2009
2009
2009

11.00
11.00
11.00
11.00
11.00
11.00
8.00

30.00
30.20
30.10
27.00
27.00
30.00
29.00

4.00
4.00
4.00
4.00
4.00
4.00
4.00

22.00
21.00
21.90
23.00
21.00
22.00
21.00

43.00
40.00
41.20
39.50
40.00
41.00
41.00

5.00
4.70
4.70
5.10
5.20
5.00
4.70

40.10
55.00
50.00
40.10
41.00
55.00
50.00

Ltd
Oriental Commercial Bank

2009

8.00

29.00

4.00

22.00

39.00

5.00

56.00

Ltd

133

Diamond Trust Bank (K) Ltd

National Bank of Kenya Ltd
Family Bank Ltd
Imperial Bank Ltd
Housing Finance Co. of

2010
2010
2010
2010
2010

8.00
8.00
8.00
8.00
8.00

28.00
29.00
29.00
29.00
28.00

4.00
4.00
4.00
4.00
4.00

23.00
21.00
23.00
22.00
23.00

43.80
44.00
42.50
40.00
41.00

6.00
4.70
4.70
4.40
5.00

51.00
50.00
47.00
40.10
45.00

Kenya Ltd
Bank of India
Guaranty Trust Bank Ltd
African Banking Corporation

2010
2010
2010

8.00
8.00
8.00

29.00
30.00
29.00

4.70
4.70
4.00

21.00
21.00
22.00

44.00
43.00
40.00

5.00
5.00
6.00

43.00
47.00
50.00

Ltd
Jamii Bora Bank Ltd
Paramount Universal Bank

2010
2010

8.00
8.00

29.50
25.00

4.00
3.00

21.00
22.00

43.00
40.00

5.00
5.00

50.00
51.00

Ltd
Standard Chartered Bank (K)

2011

8.00

30.50

4.50

21.00

43.00

7.00

51.00

Ltd
Imperial Bank Ltd
Housing Finance Co. of

2011
2011

8.00
8.00

28.40
28.00

4.50
4.10

22.00
21.00

39.50
41.00

5.00
5.50

50.00
40.10

Kenya Ltd
Guaranty Trust Bank Ltd
Equatorial Commercial Bank

2011
2011

8.00
8.00

30.00
28.00

4.60
3.00

21.00
22.00

37.50
39.50

6.80
6.50

41.00
50.00

Ltd
Giro Commercial Bank Ltd
Paramount Universal Bank

2010
2011

8.00
8.00

27.00
29.00

4.00
3.90

21.00
21.00

40.00
44.00

5.00
4.40

51.00
40.20

Ltd
K - Rep Bank Ltd
Fidelity Commercial Bank

2011
2011

8.00
8.00

30.50
29.00

3.00
4.70

21.00
23.00

41.00
44.00

6.00
8.00

50.00
47.00

Ltd
First Community Bank Ltd
Trans - National Bank Ltd
Jamii Bora Bank Ltd
Credit Bank Ltd
Dubai Bank Ltd
UBA Kenya Ltd
Oriental Commercial Bank

2011
2011
2011
2011
2011
2011
2012

8.00
8.00
8.00
8.00
8.00
8.20
8.00

29.00
29.00
27.00
28.70
27.00
30.20
30.00

4.00
4.50
4.00
4.00
4.00
4.00
4.00

22.00
21.00
23.00
21.00
22.00
22.00
22.00

39.00
39.50
41.00
38.00
40.00
39.00
44.00

7.00
5.00
4.40
7.00
6.90
8.00
6.00

54.90
50.00
54.90
56.00
40.10
40.10
51.00

Ltd
I&M Bank Ltd
Citibank N.A. Kenya
Citibank N.A. Kenya
Family Bank Ltd
Imperial Bank Ltd
Housing Finance Co. of

2012
2012
2012
2012
2012
2012

8.00
8.00
8.00
8.00
8.00
8.00

27.00
29.00
28.00
27.00
30.00
30.00

4.00
4.70
4.70
4.70
4.70
4.00

21.50
22.50
21.00
21.40
22.00
22.50

40.00
41.00
39.50
38.00
39.50
42.50

6.00
6.00
8.00
7.00
4.70
4.40

54.00
54.00
55.50
55.00
54.00
54.00

Kenya Ltd
Gulf African Bank Ltd
Oriental Commercial Bank

2012
2012

8.00
8.00

25.00
25.00

3.00
4.00

21.80
21.00

44.00
37.50

6.00
8.00

55.70
56.50

Ltd
Guardian Bank Ltd
First Community Bank Ltd
Trans - National Bank Ltd
Jamii Bora Bank Ltd
Paramount Universal Bank

2012
2012
2012
2012
2012

8.00
8.00
8.00
8.00
8.00

26.00
28.00
28.00
29.50
28.00

4.00
4.00
4.00
4.30
4.20

21.40
21.00
22.70
21.00
22.00

39.80
41.00
37.50
39.00
39.50

7.00
4.40
5.00
4.70
4.70

54.40
53.00
54.70
54.60
56.00

Ltd
Oriental Commercial Bank

2012

8.00

27.50

4.00

21.00

40.00

4.40

54.70

Ltd
Credit Bank Ltd
Middle East Bank (K) Ltd
Dubai Bank Ltd
CFC Stanbic Bank (K) Ltd
Diamond Trust Bank (K) Ltd
National Bank of Kenya Ltd
Chase Bank Ltd
Family Bank Ltd
Bank of India
Guaranty Trust Bank Ltd
Habib Bank Ltd

2012
2012
2012
2013
2013
2013
2013
2013
2013
2013
2013

8.00
8.00
8.00
8.00
8.00
8.00
8.00
8.00
8.00
8.00
8.00

28.30
27.30
28.00
29.50
29.00
28.00
27.00
28.90
30.00
28.00
30.00

4.00
4.00
3.00
4.70
4.00
3.00
4.00
4.00
4.00
4.30
3.80

21.00
21.00
22.00
21.00
21.00
21.00
21.00
21.00
22.00
21.00
21.00

37.50
38.00
41.00
41.00
40.00
41.00
39.50
38.00
40.00
41.00
41.00

4.50
4.70
4.40
4.70
4.70
6.00
4.70
4.70
5.00
4.40
4.40

56.00
56.00
54.00
54.80
56.00
53.60
54.40
50.00
50.00
56.00
50.00

134

Paramount Universal Bank

2013

8.00

30.00

4.10

22.00

39.50

6.00

56.00

Ltd
UBA Kenya Ltd
I&M Bank Ltd
Development Bank of Kenya

2013
2013
2013

8.00
8.20
8.20

30.90
28.00
30.40

4.00
4.70
4.00

22.00
21.00
21.00

39.00
41.00
40.00

7.00
4.40
5.00

50.00
56.00
56.00

Ltd
Victoria Commercial Bank

2013

8.40

30.00

4.30

21.00

41.00

4.70

50.00

Ltd
Habib Bank A.G. Zurich
Bank of Africa (K) Ltd
Guaranty Trust Bank Ltd
UBA Kenya Ltd
Barclays Bank of Kenya Ltd
National Bank of Kenya Ltd
Chase Bank Ltd
Jamii Bora Bank Ltd
Bank of Africa (K) Ltd
Habib Bank Ltd
Oriental Commercial Bank

2013
2012
2012
2011
2012
2012
2012
2009
2010
2010
2010

8.40
8.50
8.80
8.90
8.90
8.90
8.90
9.00
9.00
9.00
9.00

28.00
29.00
26.00
28.00
28.00
29.00
28.00
27.00
27.00
30.50
29.00

3.60
4.00
4.00
4.00
4.00
4.00
4.70
4.00
4.00
4.00
4.00

22.00
22.50
21.00
21.00
21.00
21.50
20.50
22.00
21.00
23.00
23.00

41.00
39.60
40.00
39.50
41.00
43.00
39.00
41.00
43.50
44.00
41.00

6.00
6.00
7.00
6.00
7.50
6.00
7.00
5.00
6.00
4.40
5.00

50.00
56.00
54.00
41.00
52.00
54.00
54.50
47.00
41.00
55.00
49.00

Ltd
Dubai Bank Ltd
CFC Stanbic Bank (K) Ltd
Diamond Trust Bank (K) Ltd
I&M Bank Ltd
NIC Bank Ltd
National Bank of Kenya Ltd
Citibank N.A. Kenya
Chase Bank Ltd
Bank of Baroda (K) Ltd
Bank of Africa (K) Ltd
Family Bank Ltd
Bank of India
Ecobank Kenya Ltd
African Banking Corporation

2010
2011
2011
2011
2011
2011
2011
2011
2011
2011
2011
2011
2011
2011

9.00
9.00
9.00
9.00
9.00
9.00
9.00
9.00
9.00
9.00
9.00
9.00
9.00
9.00

30.00
29.00
28.00
29.00
29.00
28.00
29.00
30.00
29.00
28.00
29.40
30.70
30.00
28.00

4.00
4.20
4.00
4.00
4.00
4.70
4.70
4.70
4.00
4.00
4.20
4.10
4.00
4.70

22.00
23.00
22.00
21.00
22.00
23.00
22.00
21.00
22.00
23.00
21.00
23.00
22.00
22.00

40.00
41.00
44.00
43.00
40.00
41.00
42.00
44.00
40.00
37.50
39.00
40.00
44.00
38.00

4.40
5.00
4.70
5.00
5.00
4.40
5.00
6.00
6.50
7.20
6.50
7.20
6.00
7.50

41.00
47.00
56.00
40.10
41.00
41.00
46.00
40.10
45.00
55.00
51.00
56.00
41.00
45.50

Ltd
Victoria Commercial Bank

2011

9.00

27.00

4.00

22.00

41.00

4.70

56.00

Ltd
Oriental Commercial Bank

2011

9.00

29.00

4.00

22.00

44.00

5.00

55.00

Ltd
Commercial Bank of Africa

2012

9.00

27.00

4.70

21.50

39.70

7.00

55.50

Ltd
Ecobank Kenya Ltd
African Banking Corporation

2012
2012

9.00
9.00

28.00
28.00

4.00
4.00

22.50
21.50

39.50
41.00

6.00
8.00

55.70
55.00

Ltd
Equatorial Commercial Bank

2012

9.00

26.00

4.00

20.50

44.00

7.00

54.70

Ltd
Giro Commercial Bank Ltd
Victoria Commercial Bank

2012
2012

9.00
9.00

27.00
28.00

3.00
4.00

22.50
20.50

41.50
40.40

6.00
4.70

54.50
56.00

Ltd
K - Rep Bank Ltd
Fidelity Commercial Bank

2012
2012

9.00
9.00

26.00
28.50

4.00
4.00

21.60
22.70

41.50
39.50

6.00
5.00

55.00
54.00

Ltd
Habib Bank A.G. Zurich
Habib Bank Ltd
Co-operative Bank of Kenya

2012
2012
2013

9.00
9.00
9.00

29.00
28.00
28.00

4.00
4.20
4.00

21.00
21.00
21.00

40.00
38.00
39.00

4.70
4.70
4.70

54.00
56.00
56.00

Ltd
Standard Chartered Bank (K)

2013

9.00

28.00

4.70

21.00

39.50

4.40

54.00

Ltd
Commercial Bank of Africa

9.00

29.00

4.00

21.00

44.00

5.00

56.00

Ltd
NIC Bank Ltd
Citibank N.A. Kenya
Bank of Baroda (K) Ltd

2013
2013
2013

29.00
28.00
27.00

4.00
4.00
4.00

21.00
22.00
21.00

40.00
43.00
40.00

5.00
6.70
4.70

56.00
56.00
51.00

9.00
9.00
9.00

135

Bank of Africa (K) Ltd

Prime Bank Ltd
Imperial Bank Ltd
Oriental Commercial Bank

2013
2013
2013
2013

9.00
9.00
9.00
9.00

29.00
28.00
28.90
30.90

4.00
3.00
4.00
3.00

21.00
22.00
21.00
21.00

41.00
37.50
40.00
37.50

5.30
5.20
5.10
4.70

49.00
56.00
56.00
56.00

Ltd
Credit Bank Ltd
Credit Bank Ltd
UBA Kenya Ltd
NIC Bank Ltd
Middle East Bank (K) Ltd
Co-operative Bank of Kenya

2013
2010
2010
2012
2013
2009

9.00
9.40
9.40
9.50
9.50
10.00

29.00
28.50
30.00
29.00
28.00
29.00

4.20
4.00
3.00
4.00
3.20
4.70

21.00
21.00
21.00
21.00
21.00
21.00

40.00
43.50
43.00
44.00
41.00
39.00

8.00
5.00
5.00
4.40
6.00
4.40

50.00
56.00
41.00
53.70
56.00
54.00

Ltd
Standard Chartered Bank (K)

2009

10.00

29.00

3.00

22.00

39.50

5.00

55.00

Ltd
Habib Bank Ltd
Co-operative Bank of Kenya

2009
2010

10.00
10.00

29.00
26.00

4.00
4.00

23.00
23.00

42.00
38.00

4.40
4.40

51.00
47.00

Ltd
Standard Chartered Bank (K)

2010

10.00

30.00

4.00

21.00

39.00

5.00

50.00

Ltd
Commercial Bank of Africa

2010

10.00

30.50

4.00

22.00

41.00

6.50

50.00

Ltd
Bank of Baroda (K) Ltd
Commercial Bank of Africa

2010
2010

10.00
10.00

29.00
28.00

4.00
4.00

22.00
22.00

41.00
43.50

6.00
5.00

40.90
46.00

Ltd
Trans - National Bank Ltd
Equity Bank Ltd
Barclays Bank of Kenya Ltd
Commercial Bank of Africa

2010
2010
2011
2011

10.00
10.00
10.00
10.00

27.00
30.50
30.90
29.00

4.00
4.00
4.00
4.30

22.00
21.00
22.00
21.00

44.00
44.00
40.00
44.00

4.70
5.00
7.50
8.00

51.00
47.00
45.00
50.00

Ltd
Commercial Bank of Africa

2011

10.00

28.00

4.00

22.00

43.00

7.50

50.00

Ltd
Co-operative Bank of Kenya

2012

10.00

28.00

4.00

22.50

40.00

6.50

54.00

Ltd
Standard Chartered Bank (K)

2012

10.00

27.00

3.00

20.50

41.00

6.50

51.90

Ltd
Diamond Trust Bank (K) Ltd
Kenya Commercial Bank Ltd
Barclays Bank of Kenya Ltd
Commercial Bank of Africa

2012
2013
2009
2012

10.00
10.00
10.10
10.55

27.00
28.00
28.00
27.00

4.00
4.00
4.70
4.00

21.00
21.00
23.00
21.00

41.00
37.50
44.00
43.00

4.50
4.90
6.00
5.50

54.00
40.10
50.00
56.00

Ltd
Kenya Commercial Bank Ltd
Equity Bank Ltd
Barclays Bank of Kenya Ltd
Chase Bank Ltd
Gulf African Bank Ltd
Equatorial Commercial Bank

2010
2010
2010
2010
2010
2010

11.00
11.00
11.00
11.00
11.00
11.00

27.00
29.00
30.40
29.00
29.00
28.00

4.00
4.00
4.70
3.00
4.00
4.00

22.00
23.00
22.00
21.00
23.00
22.00

41.00
37.50
39.50
40.00
41.00
44.00

4.70
6.50
6.00
8.00
6.00
5.00

51.00
45.00
56.00
40.10
55.50
40.50

Ltd
Giro Commercial Bank Ltd
Victoria Commercial Bank

2010
2010

11.00
11.00

29.00
30.00

4.00
4.00

23.00
21.00

44.00
43.00

4.70
4.40

41.00
41.00

Ltd
Paramount Universal Bank

2010

11.00

30.00

4.00

22.00

40.00

5.00

46.00

Ltd
Oriental Commercial Bank

2010

11.00

29.00

4.00

21.00

41.00

6.00

47.00

Ltd
K - Rep Bank Ltd
Guardian Bank Ltd
Fidelity Commercial Bank

2010
2010
2010

11.00
11.00
11.00

27.50
27.00
27.00

4.00
4.00
4.00

22.00
23.00
21.00

44.00
44.00
43.00

7.00
5.00
6.00

50.00
51.00
40.10

Ltd
Habib Bank A.G. Zurich
First Community Bank Ltd
Kenya Commercial Bank Ltd
Co-operative Bank of Kenya

2010
2010
2010
2009

11.00
11.00
11.00
11.00

28.00
28.50
30.20
30.00

4.00
4.00
4.00
4.00

22.00
21.00
23.00
22.00

40.00
42.00
41.00
44.00

5.00
5.00
5.00
7.00

54.90
50.00
46.00
50.00

136

Ltd
Kenya Commercial Bank Ltd
Equity Bank Ltd
Bank of India
Paramount Universal Bank

2012
2012
2012
2012

11.00
11.00
11.00
11.00

27.00
29.00
27.00
27.00

4.00
4.60
4.00
4.00

21.00
20.50
21.00
21.50

40.00
39.00
39.00
42.40

6.90
7.10
7.00
7.00

56.00
54.00
54.00
54.00

Ltd
Equity Bank Ltd
Barclays Bank of Kenya Ltd
Commercial Bank of Africa

2013
2013
2012

11.00
11.00
11.20

29.00
30.00
29.00

4.00
4.00
4.00

22.00
21.00
22.50

38.00
40.00
40.00

6.00
5.00
6.00

55.70
56.00
40.10

Ltd
Kenya Commercial Bank Ltd
Kenya Commercial Bank Ltd

2009
2009

11.60
11.60

28.00
30.00

4.70
2.60

21.00
22.00

37.50
38.00

8.00
7.80

56.00
55.00

137

Appendix viii: List of CBK Prudential Regulations (2006) for Commercial Banks
1.CBK/PG/1
2.CBK/PG/2
3.CBK/PG/3
4.CBK/PG/4
5. CBK/PG/5
6. CBK/PG/6
7.CBK/PG/7
8.CBK/PG/8
9.CBK/PG/9
10. CBK/PG/10
11.CBK/PG/11

Licensing of New Institutions

Corporate Governance
Capital Adequacy
Risk Classification of Assets and Provisioning
Liquidity Management
Foreign Exchange Exposure Limits
Prohibited Business
Proceeds of Crime and Money Laundering Prevention
Appointment, duties and responsibilities of External Auditors
Publication of Financial Statements
Opening of a new place of Business, closing existing place of

12.CBK/PG/12

Business or changing location of a place of Business

Mergers, Amalgamations, Transfer of Assets and Liabilities

13. CBK/PG/13

Enforcement of Banking Laws and Regulations

14 CBK/PG/14

Business Continuity Management

15 CBK/PG/15

Agent Banking

16 CBK/PG/16

Outsourcing

18 CBK/PG/17

Representative Office

19 CBK/PG/18

Voluntary Liquidation

20 CBK/PG/19

Consolidated Supervision

21 CBK/PG/20

Stress Testing

22 CBK/PG/21

Prompt Corrective Action

(Source: CBK, 2015)

138

Appendix ix : Correlation Matrix effect of CBK regulatory requirement

Correlations
ROE
ROA
CR
1.000
.011
.008
.
.871
.905
215
215
215
.011
1.000
.023
.871
.
.736
215
215
215
.008
.023
1.000
.905
.736
.
215
215
215
.070
.048
.068
.309
.487
.322
215
215
215
-.003
.035
.032
.960
.605
.639
215
215
215
-.054
-.091
-.192**
.435
.184
.005
215
215
215

Correlation Coefficient
ROE
Sig. (2-tailed)
N
Correlation Coefficient
ROA
Sig. (2-tailed)
N
Correlation Coefficient
CR
Sig. (2-tailed)
N
Spearman's rho
Correlation Coefficient
LM
Sig. (2-tailed)
N
Correlation Coefficient
CRM
Sig. (2-tailed)
N
Correlation Coefficient
CG
Sig. (2-tailed)
N
**. Correlation is significant at the 0.01 level (2-tailed).

LM
.070
.309
215
.048
.487
215
.068
.322
215
1.000
.
215
-.100
.144
215
-.203**
.003
215

CRM
-.003
.960
215
.035
.605
215
.032
.639
215
-.100
.144
215
1.000
.
215
-.054
.435
215

CG
-.054
.435
215
-.091
.184
215
-.192**
.005
215
-.203**
.003
215
-.054
.435
215
1.000
.
215

Return on Equity (ROE), Return on asset (ROA), Capital Requirement(CR) , Liquidity Management(LM) , Credit risk management and Corporate
governance (CG

Autocorrelations
Series: Return on Equity for Commercial banks
Lag

Autocorrelation

Std. Errora

Box-Ljung Statistic
Value

Sig.b

df

.194

.068

8.207

.004

.020

.068

8.295

.016

.105

.067

10.722

.013

.050

.067

11.266

.024

.094

.067

13.227

.021

.096

.067

15.285

.018

.064

.067

16.216

.023

.016

.067

16.275

.039

-.065

.066

17.228

.045

10

-.077

.066

18.574

10

.046

11

-.074

.066

19.816

11

.048

12

.102

.066

22.207

12

.035

13

.031

.066

22.429

13

.049

14

-.073

.066

23.673

14

.050

15

-.077

.065

25.065

15

.049

16

-.087

.065

26.850

16

.043

a. The underlying process assumed is independence (white noise).

139

b. Based on the asymptotic chi-square approximation.

Autocorrelations
Series: Return on Asset for Commercial banks
Lag

Autocorrelation

Std. Errora

Box-Ljung Statistic
Value

Sig.b

df

-.117

.068

2.997

.083

.147

.068

7.728

.021

.007

.067

7.740

.052

-.073

.067

8.925

.063

.037

.067

9.231

.100

.053

.067

9.852

.131

.046

.067

10.334

.170

.001

.067

10.334

.242

.051

.066

10.916

.282

10

.055

.066

11.612

10

.312

11

-.041

.066

12.005

11

.363

12

.001

.066

12.006

12

.445

140

13

.015

.066

12.057

13

.523

14

.032

.066

12.298

14

.582

15

.038

.065

12.633

15

.631

16

.039

.065

12.988

16

.674

a. The underlying process assumed is independence (white noise).

b. Based on the asymptotic chi-square approximation.

Autocorrelations
Series: Corporate governance for Commercial banks
Lag

Autocorrelation

Std. Errora

Box-Ljung Statistic
Value

Sig.b

df

.206

.068

9.279

.002

.188

.068

17.036

.000

.277

.067

33.867

.000

.281

.067

51.359

.000

.114

.067

54.238

.000

.147

.067

59.055

.000

.215

.067

69.427

.000

.181

.067

76.836

.000

.177

.066

83.970

.000

10

.044

.066

84.408

10

.000

11

.067

.066

85.421

11

.000

12

.078

.066

86.807

12

.000

13

.075

.066

88.118

13

.000

14

-.019

.066

88.203

14

.000

15

-.007

.065

88.214

15

.000

16

.060

.065

89.068

16

.000

141

a. The underlying process assumed is independence (white noise).

b. Based on the asymptotic chi-square approximation.

Autocorrelations
Series: Capital requirement for Commercial banks
Lag

Autocorrelation

Std. Errora

Box-Ljung Statistic
Value

Sig.b

df

.001

.068

.000

.987

.085

.068

1.589

.452

.070

.067

2.678

.444

.101

.067

4.929

.295

.187

.067

12.697

.026

-.046

.067

13.162

.041

.129

.067

16.881

.018

-.042

.067

17.281

.027

.095

.066

19.314

.023

10

.105

.066

21.836

10

.016

11

.010

.066

21.860

11

.025

12

-.009

.066

21.880

12

.039

13

-.173

.066

28.832

13

.007

14

.069

.066

29.944

14

.008

15

.086

.065

31.688

15

.007

142

16

-.060

.065

32.542

16

.008

Autocorrelations
Series: Credit risk Management for Commercial banks
Lag

Autocorrelation

Std. Errora

Box-Ljung Statistic
Value

Sig.b

df

.351

.068

26.804

.000

.022

.068

26.907

.000

-.125

.067

30.353

.000

.009

.067

30.372

.000

.076

.067

31.671

.000

.129

.067

35.402

.000

.054

.067

36.065

.000

.062

.067

36.935

.000

-.051

.066

37.529

.000

10

-.100

.066

39.826

10

.000

11

-.127

.066

43.507

11

.000

12

-.055

.066

44.210

12

.000

13

-.090

.066

46.061

13

.000

14

-.032

.066

46.304

14

.000

15

-.099

.065

48.595

15

.000

16

-.083

.065

50.211

16

.000

143

Autocorrelations
Series: liquidity Management on for Commercial banks
Lag

Autocorrelation

Std. Errora

Box-Ljung Statistic
Value

Sig.b

df

.227

.068

11.231

.001

.099

.068

13.365

.001

.044

.067

13.796

.003

.077

.067

15.095

.005

-.019

.067

15.173

.010

.016

.067

15.229

.019

-.088

.067

16.984

.017

-.014

.067

17.026

.030

.001

.066

17.026

.048

10

.066

.066

18.022

10

.055

11

-.030

.066

18.230

11

.076

12

-.012

.066

18.263

12

.108

13

-.030

.066

18.470

13

.140

14

-.072

.066

19.657

14

.141

15

-.045

.065

20.131

15

.167

16

.090

.065

22.040

16

.142

144

145