CAPITAL ADEQUACY REGULATION EFFECT ON PROFITABILITY OF COMMERCIAL BANKS LISTED IN NAIROBI SECURITIES EXCHANGE IN KENYA

Abstract

Commercial banks’ working environment is the most highly regulated environment around the globe and this explains why banking regulations continually attract theoretical scrutiny. In Kenya, the Central bank of Kenya sets the rules and the regulations that every bank is supposed to operate by. Such regulations and guidelines are important as they are meant to protect the interest of depositors, creditors and investors as well as promoting integrity in financial markets. Commercial banks in Kenya have faced challenges related to performance that include decline in profits, being placed under receivership while at the same time registering high number of nonperforming loans. This has happened in the wake of revision of guidelines and regulations under CBK Act (Chapter 491, Kenyan law). This study therefore, sought to investigate the effect of capital adequacy regulations on profitability of commercial banks that are listed by Nairobi Securities Exchange. This research applied a descriptive research design. Population of interest were managers at the three levels of management; risk and compliance, credit and finance department in all 11 registered commercial banks which are listed in the NSE. This research used secondary data and primary data. A pretest was done to enhance reliability and validity of the research instrument. Both qualitative and quantitative data was produced by the research. The researcher further used regression analysis to test the relationship between capital adequacy regulation and profitability of commercial banks. The results show that capital adequacy management play an important role in ensuring smooth banking operation in that sufficient capital helped in cushioning risk such as default in loan repayment. The study concludes that revision of CBK's prudential guidelines and regulation fostered a positive performance by commercial banks that are listed at the NSE. It’s therefore paramount for banks to continue ensuring that they have sufficient