THE EFFECT OF CAPITAL ADEQUACY DIMENSIONS ON FINANCIAL PERFORMANCE OF LISTED COMMERCIAL BANKS IN KENYA
THE EFFECT OF CAPITAL ADEQUACY DIMENSIONS ON FINANCIAL PERFORMANCE OF LISTED COMMERCIAL BANKS IN KENYA
Nicodemus Onchari Orando - Master’s Student, Kisii University, Kenya
Dr. Andrew Nyangau (PhD) - Lecturer, Department of Accounting and Finance, School of Business and Economics, Kisii University, Kenya
Dr. Asenath Maobe (PhD) - Lecturers, Department of Accounting and Finance, School of Business and Economics, Kisii University, Kenya
ABSTRACT
This study investigates the effect of capital adequacy dimensions on the financial performance of listed commercial banks in Kenya. Capital adequacy is a critical factor in ensuring the resilience, stability, and regulatory compliance of banks, enabling them to absorb potential losses and protect stakeholders. The study focuses on how various components of capital adequacy primarily Tier 1 and Tier 2 capital impact financial outcomes measured by performance indicators such as Return on Assets (ROA) and Return on Equity (ROE). Using a descriptive research design, the study analyzed secondary financial data from 12 banks listed on the Nairobi Securities Exchange over a five-year period. Statistical tools, including regression analysis, were employed to examine the relationship between capital adequacy and financial performance. Findings reveal that capital adequacy significantly influences financial performance, with an R-square value of 0.266 indicating that 26.6% of variations in financial performance can be explained by capital adequacy levels. The study observed considerable differences in capital adequacy ratios among banks, with Stanbic Holdings Plc exhibiting the highest capital adequacy and corresponding superior financial performance, while Diamond Trust Bank recorded the lowest figures. Regression results showed a positive and statistically significant coefficient (β = 0.148, p = 0.019), confirming that higher capital adequacy is associated with improved financial performance. The study concludes that maintaining robust capital adequacy levels enhances a bank’s ability to manage risks, meet regulatory requirements, and achieve sustainable profitability. It recommends that listed commercial banks in Kenya strengthen their regulatory capital buffers and implement effective risk management strategies to optimize financial outcomes and safeguard stakeholders’ interests.
