Effect of Capital on the Financial Performance of Commercial Banks in Kenya
Keywords:
Basel capital adequacy framework, Capital adequacy, Core capital, Subordinate capital, Risk weighted capitalAbstract
This study sought to examine the effect of capital on the financial performance of commercial banks in Kenya. The specific objectives of the study were to determine the effects of core capital, subordinate capital and risk weighted capital on the financial performance of commercial banks in Kenya. The study adopted a descriptive research design. The target population was the listed commercial banks in Kenya as licensed by the Central Bank of Kenya as of 2014. The study was based on secondary data retrieved from the banks’ annual audited financial reports spanning 5 years between 2010 and 2014. The study was based on quantitative data. The study findings showed that the core capital to total risk weighted assets for the Tier I banks decreased from year 2010 to year 2014 while that of the Tier II banks decreased from year 2010 to year 2014. The findings also showed that the total capital to total risk weighted assets for the Tier I banks decreased from year 2010 to year 2014 while that of the Tier II banks decreased from year 2010 to year 2014. The findings further showed that both Tier I and Tier II banks maintained their core capital to total risk weighted assets ratios and their total capital to total risk weighted assets ratios at a significantly higher level than the set minimum requirement of 8% and 12%, respectively.
References
• Agoraki, M., Delis, M., & Pasiouras, F. (2011). Regulations, competition and bank risk-taking in transition countries. Journal of Financial Stability, 7(1), 38-48.
• Albertazzi, U. & Gambacorta, L. (2009). Bank profitability and the business cycle. Journal of Financial Stability, 5, 393–409.
• Altunbas, Y.S., Carbo, E., Gardener, P.M., & Molyneux, P. (2007). Examining the relationships between capital, risk and efficiency in European banking. European Financial Management, 13(1), 49–70.
• Aspal, P.K., & Nazneen, A. (2014). An empirical analysis of capital adequacy in the Indian private sector banks. American Journal of Research Communication, 2(11), 28-42.
• Athanasoglou, P., Brissimis, S., & Delis, M. (2013). Bank-specific, industry-specific and macroeconomic determinants of bank profitability. Journal of international financial Markets, Institutions and Money, 18(2), 121-136.
• Balin, B.J. (2010). The impact of the global economic crisis on sovereign wealth funds. Asian-Pacific Economic Literature, 24(1), 1-8.
• Barrios, V.E., & Blanco, J.M. (2003). The effectiveness of bank capital adequacy regulation: A theoretical and empirical approach. Journal of Banking & Finance, 27(10), 1935-1958.
• Basel Committee on Banking Supervision, BCBS (2009). “Capital Requirements and Bank Behaviour: The Impact of Basel Accordâ€. Bank for International Settlements working Paper No. 1. Basle, Switzerland.
• Basel Committee on Banking Supervision (2010). Basel III: A global regulatory framework for more resilient banks and banking systems. Basel, Switzerland: Bank for International Settlements.
• Bateni, L., Vakilifard, H., & Asghari, F. (2014). The influential factors on capital adequacy ratio in Iranian banks. International Journal of Economics and Finance, 6(11), 108.
• Beck, T., Demirgüç-Kunt, A., and Levine, R. (2006). Bank concentration, competition and crises: First results. Journal of Banking and Finance, 30, 1581-603.
• Berger, A.N., Klapper, L.F., and Turk-Ariss, R., (2009). Bank competition and financial stability. Journal of Financial Services Research, 35, 99-118.
• Berger, A.N., & Bouwman, C.H. (2013). How does capital affect bank performance during financial crises? Journal of Financial Economics, 109(1), 146-176.
• Blundell-Wignall, A., & Atkinson, P. (2010). Thinking beyond Basel III. OECD Journal: Financial Market Trends, 2010(1), 9-33.
• Booth, L., Aivazian, V., Demirguc-Kunt, A., & Maksimovic, V. (2001). Capital structure in developing countries. The Journal of Finance, 56, 87-130
• Bowa, C.M. (2015). Effect of bank capitalization on liquidity of commercial banks in Kenya (Doctoral dissertation, University of Nairobi).
• Caggiano, G., & Calice, P. (2011). The macroeconomic impact of higher capital ratios on African economies. African Development Bank Group.
• Calice, P. (2010). A Preliminary Assessment of the Implications of Financial Regulatory Reform for Africa, Policy Brief No 3/2010, African Development Bank.
• Central Bank of Kenya, CBK (2014). Bank Supervision Annual Report 2014. Retrieved from www.centralbank.go.ke.
• Cytonn investments (2015). Kenya Listed Commercial Banks Analysis. Cytonn Q3 2015 Banking Sector Report. Retrieved from www.cytonn.com.
• Demirgüç-Kunt, A., & Huizinga, H. (1999). Determinants of commercial bank interest margins and profitability: Some international evidence. The World Bank Economic Review, 13(2), 379-408.
• Demirgucâ€Kunt, A., Detragiache, E., & Merrouche, O. (2013). Bank capital: Lessons from the financial crisis. Journal of Money, Credit and Banking, 45(6), 1147-1164.
• Drumond, I. (2009). Bank capital requirements, business cycle fluctuations and the Basel accords: a synthesis. Journal of Economic Surveys, 23(5), 798-830.
• Farhat, J., Cotei, C., & Abugri, B. (2006). The pecking order hypothesis vs. the static trade-off theory under different institutional environments. Preliminary draft, 39.
• Francis, W., & Osborne, M. (2009). Bank regulation, capital and credit supply: measuring the impact of prudential standards. Occasional paper, 36.
• Francis, M.E. (2013). Determinants of commercial bank profitability in Sub-Saharan Africa. International journal of economics and finance, 5(9), 134.
• Frank, M.Z., & Goyal, V.K. (2007). Trade-off and pecking order theories of debt. Available at SSRN 670543
• Goddard, J., Molyneux, P., & Wilson, J. (2004). The profitability of European banks: a crossâ€sectional and dynamic panel analysis. The Manchester School, 72(3), 363-381.
• Gropp, R., and Heider, F. (2010). The Determinants of Bank Capital Structure. Review of Finance, 14, 587–622
• Hakenes, H., & Schnabel, I. (2011). Bank size and risk-taking under Basel II. Journal of Banking & Finance, 35(6), 1436-1449.
• Hellwig, M.F. (2010). Capital regulation after the crisis: business as usual? MPI Collective Goods Preprint, (2010/31).
• Jokipii, T., & Milne, A. (2011). Bank capital buffer and risk adjustment decisions. Journal of Financial Stability, 7(3), 165-178.
• Knevels, N. (2014). The impact of Basel III on banks’ value. MSc. Finance Thesis, Tilburg University
• Kombo, K. (2014). Effects of Basel III Framework on Capital Adequacy of Commercial Banks in Kenya (Doctoral dissertation, United States International University-Africa).
• Kosmidou, K., Tanna, S., & Pasiouras, F. (2005, June). Determinants of profitability of domestic UK commercial banks: panel evidence from the period 1995-2002. In Money Macro and Finance (MMF) Research Group Conference (Vol. 45, pp. 1-27).
• Kraus, A., & Litzenberger, R. (1973). A stateâ€preference model of optimal financial leverage. The journal of finance, 28(4), 911-922.
• Laeven, L., & Levine, R. (2009). Bank governance, regulation and risk taking. Journal of Financial Economics, 93(2), 259-275.
• Lee, C.C. & Hsieh, M.F. (2013). The impact of bank capital on profitability and risk in Asian Banking. Journal of International Money and Finance, 32, 251–281.
• Lipunga, A.M. (2014). Determinants of Profitability of Listed Commercial Banks in Developing Countries: Evidence from Malawi. Research Journal of Finance and Accounting, 5(6), 41-49.
• Luigi, P., & Visinescu, S. (2009). A review of the capital structure theories. Annals of Faculty of Economics, 3(1), 315-320
• Miles, D., Marcheggiano, G., & Yang, J. (2011). Optimal bank capital.
• Mathuva, D.M. (2009). Capital adequacy, cost income ratio and the performance of commercial banks: The Kenyan Scenario. The International journal of applied economics and Finance, 3(2), 35-47.
• Modigliani, F., & Miller, M. (1958). The cost of capital, corporation finance and the theory of investment. The American economic review, 48(3), 261-297.
• Molyneux, P., & Thornton, J. (1992). Determinants of European bank profitability: A note. Journal of banking & Finance, 16(6), 1173-1178.
• Moreno, R. (2011). Policymaking from a macro-prudential perspective in emerging market economies, BIS Working Papers No 336, Bank for International Settlements, Basel.
• Myers, S.C. (1984). Capital structure puzzle. Journal of Finance, 39(3), 575-592
• Myers, S.C. (2001). Capital Structure. Journal of Economic Perspectives, 15(2), 81-102.
• Nasieku, T. (2014). Basel capital adequacy framework and economic efficiency of commercial banks in Kenya. Doctoral Thesis in Business Administration, Jomo Kenyatta University of Agriculture and Technology
• Ngo, P.T. (2006). Endogenous Capital and Profitability in Banking. ANUCBE School of Economics Working Paper, 464.
• Olalekan, A., & Adeyinka, S. (2013). Capital adequacy and banks’ profitability: An empirical evidence from Nigeria. American International Journal of Contemporary Research, 3(10), 87-93.
• Onaolapo, A., & Olufemi, A. (2012). Effect of Capital Adequacy on the Profitability of the Nigerian Banking Sector. Journal of money, investment and banking, 24, 61-72.
• Ongore, V.O. (2011). The relationship between ownership structure and firm performance: An empirical analysis of listed companies in Kenya. African Journal of Business Management, 5(6), 2120.
• Osterberg, W., and Thomson, J. (1996) Optimal financial structure and bank capital requirements: an empirical investigation. Journal of Financial Services Research, 10, 315– 332.
• Pasiouras, F., & Kosmidou, K. (2007). Factors influencing the profitability of domestic and foreign commercial banks in the European Union. Research in International Business and Finance, 21(2), 222-237.
• Rime, B. (2001). Capital requirements and bank behaviour: Empirical evidence for Switzerland. Journal of Banking & Finance, 25(4), 789-805.
• Rochet, J.C. (1992). Capital requirements and the behaviour of commercial banks. European Economic Review, 36(5), 1137-1170.
• Schuermann, T. (2014). Stress testing banks. International Journal of Forecasting, 30(3), 717-728.
• Shyam-Sunder, L., & Myers, S. C. (1999). Testing static tradeoff against pecking order models of capital structure. Journal of financial economics, 51(2), 219-244.
• Siljeström, A. (2013). The effect of Basel regulation on banking profitability: A cross-country study on 16 OECD countries. MSc. Thesis, KTH Industrial Engineering and Management, SE-100 44 Stockholm
• Staikouras, C., & Wood, G. (2011). The determinants of European bank profitability. International Business & Economics Research Journal (IBER), 3(6).
• Sutorova, B., & Teplý, P. (2013). The impact of Basel III on lending rates of EU banks. Finance a Uver, 63(3), 226.
• Von Thadden, E.L. (2004). Bank capital adequacy regulation under the new Basel Accord. Journal of Financial Intermediation, 13(2), 90-95.
• Waithaka, N.N. (2013). The effect of Basel II requirement on Kenyan commercial banks' lending. Doctoral dissertation, University of Nairobi
Downloads
Published
How to Cite
Issue
Section
License
- Papers must be submitted on the understanding that they have not been published elsewhere (except in the form of an abstract or as part of a published lecture, review, or thesis) and are not currently under consideration by another journal published by any other publisher.
- It is also the authors responsibility to ensure that the articles emanating from a particular source are submitted with the necessary approval.
- The authors warrant that the paper is original and that he/she is the author of the paper, except for material that is clearly identified as to its original source, with permission notices from the copyright owners where required.
- The authors ensure that all the references carefully and they are accurate in the text as well as in the list of references (and vice versa).
- Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution License that allows others to share the work with an acknowledgement of the work's authorship and initial publication in this journal.
- Authors are able to enter into separate, additional contractual arrangements for the non-exclusive distribution of the journal's published version of the work (e.g., post it to an institutional repository or publish it in a book), with an acknowledgement of its initial publication in this journal.
- Authors are permitted and encouraged to post their work online (e.g., in institutional repositories or on their website) prior to and during the submission process, as it can lead to productive exchanges, as well as earlier and greater citation of published work (See The Effect of Open Access).
- The journal/publisher is not responsible for subsequent uses of the work. It is the author's responsibility to bring an infringement action if so desired by the author.