A Study on the effect of capital adequacy on financial performance of commercial banks in Kenya

Abstract

Prudential soundness in the financial system is ensured through better self -regulation of factors such as capital adequacy, management quality and asset quality. Capital adequacy as a bank specific factor revitalizes the functioning of the banking system by acting as a buffer for losses during an economic downturn yet at the same time its use in projects leads to substantial returns. This study seeks to assess the extent to which capital adequacy affects the Return on Equity and Return on Assets for commercial banks in Kenya. A regression analysis using STAT A software was performed for the panel data collected from 6 commercial banks in the NSE from 2007- 2016. The results from the analysis show that a. unit increase in CAR increases ROE by 0.0558141 and increases ROA by 0.2033251. Based on the findings, capital adequacy plays a vital role in the financial performance of commercial banks. This implies that banks should hold more capital to buffer them against economic downturns and for better financial performance