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THE EFFECTS OF CAPITAL REQUIREMENTS ON OPERATING
EFFICIENCY OF COMMERCIAL BANKS IN KENYA
BY
ROSYMARY JERUIYOT MURKOMEN
A RESEARCH PROJECT PRESENTED IN PARTIAL FULFILLMENT OF THE
REQUIREMENTS OF THE MASTER OF BUSINESS ADMINISTRATION
DEGREE TO THE SCHOOL OF BUSINESS, UNIVERSITY OF NAIROBI
NOVEMBER 2016
ii
DECLARATION
This is to declare that this research project is my original work that has not been
presented to any other university or institution of Higher Learning for an award of a
degree.
ROSYMARY JERUIYOT MURKOMEN D61 / 77227 / 2015
Signature …………………………………….. Date ……………………………….
This research project has been submitted for examination with my approval as the
University Supervisor.
MR. JAMES NG’ANG’A
LECTURER, DEPARTMENT OF FINANCE AND ACCOUNTING
SCHOOL OF BUSINESS
UNIVERSITY OF NAIROBI
Signature …………………………………….. Date ……………………………….
iii
ACKNOWLEDGEMENTS
I would like to extend my deepest gratitude to the Almighty God who gave me the strength to
undertake this project.
My supervisor Mr. James Nga‟ng‟a, I am forever grateful for the support and guidance. This
work was demanding but you were ever at my disposal for advice and guidance. Thank you.
Special thanks to all my family members for their encouraging advice and support during the
entire course. I love you all.
iv
DEDICATION
This project is dedicated to my dear husband Alexander Langat and my children; Adrian
Kiprotich, Ryan Kiprop and Kayla Cheptoo, my parents and parents-in-law, brothers and
sisters. I love you all and may God‟s blessings be showered upon you all.
v
TABLE OF CONTENTS
DECLARATION.............................................................................................................. II
ACKNOWLEDGEMENTS ........................................................................................... III
DEDICATION................................................................................................................. 1V
LIST OF TABLES .........................................................................................................VII
LIST OF ABREVIATIONS ........................................................................................ VIII
ABSTRACT ..................................................................................................................... IX
CHAPTER ONE ................................................................................................................1
INTRODUCTION..............................................................................................................1
1.1 Background of the Study .................................................................................... 1
1.1.1 Capital Requirements ......................................................................................2
1.1.2 Operating Efficiency ......................................................................................3
1.1.3 Effect s of Capital Requirements on Operating Efficiency ............................4
1.1.4 Commercial Banks in Kenya ..........................................................................5
1.2 Research Problem ................................................................................................. 6
1.3 Objective of the Study .......................................................................................... 8
1.4 Value of the Study ................................................................................................ 8
CHAPTER TWO ............................................................................................................ 10
LITERATURE REVIEW .............................................................................................. 10
2.1 Introduction ......................................................................................................... 10
2.2 Theoretical Literature Review ............................................................................ 10
2.2.1 Theory of Economic Efficiency ....................................................................10
2.2.2 Trade off Theory ...........................................................................................11
2.2.3 The Capital Buffer Theory ............................................................................13
2.3 Determinants of Operating Efficiency of Commercial Banks in Kenya……….14
2.3.1 Internal Factors .............................................................................................14
2.3.2 External Factors ............................................................................................14
2.4 Empirical Studies ................................................................................................ 15
2.5 Summary of the Literature Review ..................................................................... 17
2.5 The Conceptual Framework ................................................................................ 17
CHAPTER THREE .........................................................................................................19
RESEARCH METHODOLOGY ...................................................................................19
3.1 Introduction ......................................................................................................... 19
3.2 Research Design.................................................................................................. 19
3.3 Target Population ................................................................................................ 19
3.4 Data Collection ................................................................................................... 20
vi
3.5 Data Analysis ...................................................................................................... 20
3.5.1 Analytical Model .......................................................................................20
3.5.2 Tests of Significance ..................................................................................21
CHAPTER FOUR ............................................................................................................22
DATA ANALYSIS, RESULTS AND DISCUSSION ....................................................22
4.1 Introduction ......................................................................................................... 22
4.2 Results ................................................................................................................. 22
4.3 Descriptive Analysis ........................................................................................... 23
4.4 Quantitative Analysis and Relationship between Variables ............................... 24
4.4.1 Pearson and Spearman‟s Correlations ..........................................................24
4.4.1 Data Analysis ................................................................................................25
4.4.1 Hausman test… .............................................................................................25
4.4.2 Fixed Effects Regression Analysis ...............................................................27
4.4.2 Robustness Check .........................................................................................31
CHAPTER FIVE .............................................................................................................34
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS ..................................34
5.1 Introduction ......................................................................................................... 34
5.2 Summary ............................................................................................................. 34
5.3 Conclusion .......................................................................................................... 35
5.4 Recommendation ................................................................................................ 35
5.5 Limitations of the Study...................................................................................... 36
5.6 Suggestions for Further Studies .......................................................................... 36
REFERENCES .................................................................................................................38
APPENDICES ..................................................................................................................42
Appendix I: List of Commercial Banks in Kenya .................................................... 42
Appendix II: Operating Efficiency Ratio .................................................................. 43
Appendix III: Capital Requirement Ratios ............................................................... 45
vii
LIST OF TABLES
Table I: Summary Statistics .................................................................................................... 26
Table II :Pearson's Correlation Coefficient ............................................................................ 28
Table III:Hausman Test Results.............................................................................................. 30
Table IV :Summary of fixed effects multiple regression output…………………………... . 32
Table V :Summary of fixed effects regression …………………………... ........................... 35
Table VI :Analysis of Variance…………………………... ................................................... 32
viii
LIST OF ABBREVIATIONS
ANOVA Analysis of Variance
BCBS Basel Committee on Banking Supervision
CBK Central Bank of Kenya
CCTRWA Core Capital to Total Risk Weighted assets ratio
DEA Data Envelopment Analysis
ECTA Equity Capital to Total Assets Ratio
OE Operating Efficiency
TCTRWA Total Capital to Total Risk Weighted Assets ratio
ix
ABSTRACT
The objective of this study was to analyze effects of capital requirements on operating
efficiency of commercial banks in Kenya. The study was carried out over the period
2011-2015, taking advantage of the profound regulatory changes in capital requirements
that occurred during this period to measure the exogenous impact of an increase in the
capital ratios on banks‟ operating efficiency. The study adopted a descriptive research
design. The population of interest in this study consisted of all 41 commercial banks
operating in Kenya as at 31.12.2015. Data was analyzed using fixed effects regression
model to attain the best regression equation. Statistical significance was checked by an F-
test of the overall fit and t- tests of individual parameters.
The study found that operating efficiency is positively related to core capital to total risk
weighted assets ratio (tier 1 risk-based capital ratio). This implies that an increase in
capital reduces the costs of financial distress, including bankruptcy. The study also
establishes that there is a negative relationship between the equity capital to total assets
ratio and operating efficiency. Therefore, the study provides evidence that supports the
Central bank of Kenya‟s move to increase bank‟s core capital from Kshs.250 million to
Kshs.1 billion.
1
CHAPTER ONE
INTRODUCTION
1.1 Background of the Study
The banking sector plays a key role in economic development of a country by providing
liquidity. It is for this reason that it is one of the highly regulated sectors in the economy.
Global regulatory framework is developed by the Basel Committee on Banking
Supervision (BCBS). In Kenya, the Central bank of Kenya (CBK) is the regulatory body
that comes up with rules and regulations that govern the banking sector. CBK increased
the minimum capital requirements for commercial banks in the year 2008 from
Kshs.250m to kshs.1 billion by the year 2012. This was done so as to maintain a more
stable and efficient banking system. In January 2015 Banks‟ total capital to total risk-
weighted assets ratio was increased by 2.5% (from 12% to 14.5%) while core capital to
total risk weighted assets ratio was increased from 8% to 10.5% (CBK, 2013).
Operational efficiency is achieved when an organization is able to provide quality goods
and services at the least possible price (Allen and Rai, 1996). It refers to what occurs
when the right combination of inputs are used in production, while ensuring that the
budget of daily processes are maintained at the desired level (Shawk, 2008). Banks
operate efficiently by lending customers‟ savings to those organizations/individuals with
highest credit worthiness and monitoring them carefully after lending. Banks that operate
inefficiently impede economic growth and decrease the wellbeing of the members of the
society (Athanasoglou et al, 2008).
2
Banks should be regulated and supervised by an independent regulatory authority so as to
ensure that financial stability of an economy is protected. In addition, regulation helps in
protecting members of the public from being exploited by banks. Bank rules and
guidelines help in protecting customers from exploitative prices and safeguard the
banking industry against systemic risk (Llewellyn, 1999).
Capital requirement is one of the bank regulations, the Central Bank sets the minimum
capital that a bank should hold. The various assets of a bank are categorized so that they
can be risk weighted. Various scholars have carried out studies on capital requirements as
it is considered to be one of the key contributors of an organization‟s profitability
(Bourke, 1989). However, other researchers argue that increased capital levels may
increase interest rates on lending and a reduction of risk-weighted assets (RWA) by
banks.
1.1.1 Capital Requirements
This is the statutory minimum capital which a bank or other financial institution must
have available. It shows the percentage ratio of an organization‟s capital to its risk
weighted assets. The amount of capital that an institution has can be used to gauge its
financial strength and stability. As per the Basel III regulation, the primary capital base of
a bank should equal at least to eight percent of their assets (Agenor & Pereira, 2010).
In Kenya, CBK uses the international standards developed by the Basel Committee to set
the minimum capital requirement for Kenyan commercial banks. CBK increased the
minimum capital requirements for commercial banks and mortgage finance institutions
3
from Kshs.250m in the year 2008 to Kshs.1 billion by the year 2012. This was done so as
to achieve a stable and efficient banking system. In addition, banks are required to
maintain a minimum core capital to total risk weighted assets ratio of 8% and total capital
to total risk weighted assets ratio of 12%.
CBK revised the capital requirements guidelines in the year 2013 by coming up with
capital conservation buffer of 2.5%. Banks are expected to hold a capital conservation
buffer of 2.5% over and above the aforementioned capital requirement ratios of 8% and
12% (CBK, 2013). This raised the above statutory minimum ratios from 8% and 12% to
10.5% and 14.5% respectively.
1.1.2 Operating Efficiency
Operational efficiency refers to the proportion of inputs used to run a business operation
and the outputs attained. It refers to what occurs when the right combination of inputs are
used in production, while ensuring that costs are maintained at the desired level (Shawk,
2008). It is the ability to produce quality goods at the lowest cost possible. It shows the
capability of management to control costs by using resources efficiently in producing
outputs.
A firm‟s operating efficiency can be measured in many ways. However, many
researchers use accounting variables to measure efficiency. They use ratios such as
operating equity ratios (which relate revenues and costs to average equity), operating
asset ratios (which relate all revenues and costs to average assets), Operating income
ratios (which relate revenues and costs to gross income). The various financial ratios are
4
compared so as to determine how well a bank is able to attain its objectives. Despite the
fact that accounting ratios have some disadvantages, they are considered as the most
convenient tool for analysis (Halkos and Salamouris, 2004). Researchers and managers
use ratios analysis in most financial decision making processes. Brigham and Ehrhard
(2005) indicated that an analysis of an organization‟s audited financial statements will
help in identifying its strengths and weaknesses. This study will adopt the use of ratio
analysis of internal performance indicators to evaluate the determinants of banks
operating efficiency.
1.1.3 Effects of Capital Requirements on Operating Efficiency
Organizations with high capital are found to be efficient than those with little capital,
showing that the amount of capital an organization has can be used to measure its
performance (Kwani, 1997). Equity capital to total assets ratio, total capital to total assets
ratio and tier I capital ratio have been used as measures of capital adequacy, (Mathura
2009; Christian et al 2008; Hutchinson and Cox 2006; Buyuksalvarci et al 2011).
Equity capital to total assets ratio is used as a measure of banks„capital structure. This
ratio can be used to determine the leverage level of an institution. A declining trend in
this ratio may predict future capital adequacy problems and upsurge in risk exposure.
The increased regulations on capital requirements compels banks to change how they
operate internally in terms of strong corporate governance, risk assessment methods,
credit evaluation procedures, employment of more qualified staffs, and enhanced internal
control procedures. These measures are likely to result in financial,
5
Banks with huge capital are able to undertake profitable ventures, expand operations and
undertake calculated risks. However, banks with little capital will invest large amounts of
money in government securities which are less risky instead of lending. Thus, capital
adequacy is considered to have a positive relationship with efficiency.
Das and Ghosh (2006) supported the rationale for increasing capital adequacy
requirements. In his study he found that there exists a positive relationship between bank
operating efficiency and capital requirements. This finding supports the idea that banks
that have adequate capital are safe and have developed enhanced credit risk management
standards leading to enhanced efficiency.
Banks that are in violation of capital adequacy requirements of the Central Bank of
Kenya may incur punitive fines that may weaken efficiency, more so, for banks with
marginal and unsatisfactory ratios (Kenyan Banking Act Section 7).
1.1.4 Commercial Banks in Kenya
Commercial banks are categorized into three peer groups namely: large, medium and
small. The banks are ranked by using a weighted composite index that comprises total
assets, total deposits and shareholder‟s funds. Large banks have a rating of 5% and
above, medium banks rating is between 1% and 5% while that of small banks is less than
1%. The total number of banks in Kenya as at 31 December 2015 was 42.
Section 7(1) of the Banking Act states that, a bank is required to have a minimum core
capital of Kshs. 1 billion, core capital to total risk weighted assets of 8% and total capital
to total risk weighted of 12%. CBK revised the capital requirements guidelines in the
6
year 2013 by coming up with a capital conservation buffer of 2.5%. Banks are expected
to hold a capital conservation buffer of 2.5% over and above the aforementioned capital
requirement ratios of 8% and 12% (CBK, 2013). These capital adequacy requirements
are continuously monitored and reviewed from time to time by the CBK. Failure to
comply leads to loss of license, liquidation or mergers of the commercial bank.
1.2 Research Problem
The capital adequacy ratios are important from the perspective of solvency of banks and
their safety from unpleasant events which arise as a result of liquidity challenges and
credit risk that banks are exposed to in their day to day operations. Since banks help in
economic development of a nation, their solvency is very critical and thus they should be
supervised by a regulatory authority .Banks hold the savings of the whole economy in
terms of deposits. Thus, if the banking system were to go insolvent, the whole economy
would fail within no time. In addition, if the savings of members of public are lost, the
government will have to step in and pay the deposit insurance. In view of this, capital
adequacy ratio cannot be overemphasized.
Bank capital acts as a shield from losses caused by unforeseen risks. With this regard
capital is used to protect depositors against losses that may arise from the normal
operations of a bank and also from those losses that a bank may incur when it is put under
liquidation. The capital adequacy guideline issued by CBK requires each institution to
maintain capital that is commensurate to the institution‟s risk profile. This will enable the
institution to sufficiently protect its depositors in the event of financial distress (CBK,
2013).
7
The banking sector helps in sphere heading economic development of a country by
providing liquidity. It is for this reason that the government must have a regulatory
authority (body) to supervise bank operations. CBK increased the minimum capital
requirements for commercial banks in the year 2008 from Kshs.250m to kshs.1 billion by
the year 2012. This was done so as to maintain a more stable and efficient banking
system (CBK, 2013).
Berger and Bo-nacorsi di Pati (2006) found positive relationship between capital and
operating costs of commercial banks in the United States for the period 1990 to 1996.
Further, Fiordelisi, Marques-Ibanez and Molyneux (2012) found negative relationship
between capital ratio and bank efficiency for European commercial Banks for the period
1995-2007.
The main effect of capital level is its effect on cost management, capital requirement
ratios are considered to have direct influence on bank safety since it affects the level of
risk a bank can take and the size of loan book (Berger and DYoung, 1996; Podpiera &
Weill, 2009; Podpera & Podpera, 2009; Firdelisi, Marques-Ibnez and Molynux, 2012).
Odunga (2014) did a study on determinants of operating efficiency of banks in Kenya.
Among the variables used was capital adequacy. He concluded that capital requirement
ratios affect cost efficiency for banks. Therefore, banks are required to ensure that they
have enough capital to be able to improve their operating efficiency.
Odunga, Nyangweso & Nkobe (2013) did a study on impact of liquidity and capital
adequacy on operating efficiency of Commercial Banks in Kenya. They concluded that
8
those commercial banks that have huge capital are safer in terms of operations and are
able to withstand financial distress.
A common problem with these previous studies is that they do not assess the role of
prudential regulations (minimum capital requirement) that have changed over time in
Kenya. The study thus will fill this void by measuring precisely how banks‟ operating
efficiency has been affected by the changes in capital requirements.
This study will contribute to the literature by examining the impact of capital
requirements on operating efficiency in the Kenyan banking industry. The Kenyan
environment provides a unique framework to measure the direct effect of capital
adequacy regulation on banks‟ behavior, due to the recent changes in the minimum
capital ratios.
The study seeks to answer the research question; do capital requirements affect the
operating efficiency of commercial banks in Kenya?
1.3 Objective of the Study
The purpose of the study is to establish the effects of capital requirements on operating
efficiency of commercial banks in Kenya.
1.4 Value of the Study
Commercial banks would benefit from the study as it intends to provide insight on impact
of capital requirements on operation efficiency. It will help banks in designing their
capital requirements.
9
Policy holders may be able to use the findings of this research in coming up with policies
on banks‟ capital adequacy and operating efficiency. The findings will be used by the
regulator (CBK) to come up with the desired minimum core capital of Commercial Banks
in Kenya.
Academic researchers would benefit from this study as it would serve as a point of
reference and source of literature in their reviews while carrying out further studies on the
topic under study.
10
CHAPTER TWO
LITERATURE REVIEW
2.1 Introduction
Different ideas and writings advanced by different scholars, academicians and
researchers in the field of capital requirements and operating efficiency of commercial
banks are reviewed in this chapter.
2.2 Theoretical Literature Review
This section reviewed theories on capital requirements and efficiency. These theories
have been widely used and cited in various studies and researches.
2.2.1 Theory of Economic Efficiency
The classical economic efficiency theory forms the basis of the present studies on
efficiency performance of banks. According to Aly et.al, (1990), this theory stipulates
that organizations ought to produce their goods at the lowest possible cost per unit.
Based on the theory, maximum production level can be reached through large production.
In the short run, full efficiency can be achieved at the point of production where all
available resources are fully utilized. However, in the longer period, increasing the
production capacity of available facilities can lead to a rise in the maximum level of
efficiency (Zerbe, 2002).
11
Economic efficiency theory is made up of the productive efficiency and allocative
efficiency. The allocative efficiency criterion stipulates that intensified competition
between banks will prevent them from making exploitative profits by charging high
prices. A firm is able to attain optimal allocative efficiency when it produces the
maximum output of goods and services in order to optimize the advantage to the entire
organization (Aly et. al, 1990). This theory considers the fact that business resources are
limited and can be utilized only at a time.
The productive efficiency is achieved when a firm uses all of its resources efficiently by
manufacturing the maximum outputs from the least inputs (Miller et. al, 1996). The main
principles of economic efficiency theory can be used by managers to improve efficiency
of their business (Quinzi & Sujaya, 1993).
An organization is considered technically efficient if it consistently achieves more output
from the same quantities of inputs as compared to other organizations. The various
variations in economic efficiency among organizations in most cases are caused by
differences in technical efficiency. The differences are mirrored in the values of the
actual profit functions of the organizations at a given output and input prices (Isik and
Kabir, 2002).
2.2.2 Trade-Off Theory
This theory explains the leverage level of a firm. It states that a firm has to carefully
decide how much debt and equity is appropriate to finance its operations by analyzing the
costs and benefits of the two sources of finance. An organization should only use
12
additional debt when the tax saving is higher as compared to the cost of bankruptcy. In
addition, agency costs should also be analyzed when choosing the optimal level of debt
finance.
The main aim of this theory is to describe how organizations are generally funded
partially with debt and equity. The theory stipulates that there is benefit to funding with
debt, the interest paid on debt is tax deductible. However, there are costs associated with
debt financing. As an organization uses more debt, the marginal benefit of additional debt
reduces, as the marginal cost increases. Thus for a firm to optimize its overall value, a
trade-off between debt finance and equity finance should be carefully chosen.
There are some scholars who have questioned the empirical relevance of the trade-off
theory. For instance, Miller (1963) argued that in a world where there are no taxes,
bankruptcy costs and agency costs, the value of a firm is not affected by how much debt a
firm has borrowed.
Generally, if the cost of debt is low and the corporate tax rate is high to the extent that the
firm benefit significantly from debt financing, the firm will use additional debt since the
marginal tax-rate on debt is less than the corporate tax rate. In this case, the firm‟s
maximum capital structure will involve a balance between the tax benefit of debt and
leverage-associated costs. (Niu,2008).
13
2.2.3 The Capital Buffer Theory
Buffer refers to excess capital held above the minimum requirement. This means that
many banks keep on increasing their capital ratio when they have approached close to the
required minimum level.
The buffer theory (Milne and Whalley 2002) states that a bank whose capital is
marginally above the statutory minimum ratio may have a reason to increase capital and
reduce risk so as to avoid being penalized by the regulatory body for failure to comply
with the statutory minimum capital requirements. Berger et al. (1995) have argued that
banks may hold a lot of capital so as to be able to exploit unexpected investment
opportunities in future.
Banks can choose to have a “buffer” so as to lessen the possibility of their capital
dropping below the statutory requirement, particularly if the ratio is very unstable.
Second reason for holding a buffer capital is associated with the level of risk of the
bank‟s total assets. Generally, it is expected that banks with a highly risky portfolio hold
high level of buffer capital than those with a lower level. This is due to the fact that their
capital is likely to fall below the statutory minimum requirement. During period of
financial distress, undercapitalized banks may drive up systemic risk and hence hinder
financial stability. However, if banks have already meet the minimum capital plus having
a buffer capital, then any changes in capital requirements have no impact on bank‟s
behavior.
14
2.3 Determinants of operating efficiency of commercial Banks in Kenya
Bank efficiency can be measured through both internal and external determinants.
2.3.1 Internal Factors
Financial statements of a bank are used as internal determinants. As for internal
determinants, many variables such as size, amount of capital and risk management affect
operating efficiency. The size variable is considered as major determinant of bank
operating efficiency. Generally, large banks are considered to be more efficient than
small banks due to economies of scale and customer confidence level. However, very
large banks can have negative impact on bank efficiency due to bureaucratic and other
reasons. That is, a non-linear relationship can be drawn between bank size and bank
efficiency.
Credit risk is another important internal factor that affects bank efficiency. Since risk
management is vital aspect for the operational and survival of banks, any changes in
credit risk reflect on the health of banks‟ loan portfolio. That is, poor asset quality
ultimately increases the chances of bank failure (Cooper, Jackson et al. 2003).
2.3.2 External Factors
These are factors that are not within the control of management. They are factors that the
firm does not have control over them but rather they need to develop strategies to deal
with them. The presence of multinational banks intensifies the competition in the banking
sector market and thus forces domestic banks to cut cost in order to improve efficiency
(Claessens, Demirguc-Kunt et al. 2001).
15
Technology transfer by foreign banks affects positively the domestic banks‟ operation
and efficiency.
2.4 Empirical Studies
There are various studies that have tried to examine the relationship between capital
requirements and operational costs of commercial banks. Some of the empirical studies
are summarized below:
Capital requirement ratios may affect productivity in many ways. The first passage is
through bank lending. For instance, Kopecky and VanHoose(2006) argued that capital
requirement ratios affect the quantity and the quality of the loans made. Their theoretical
model illustrated when regulatory capital requirement ratios is introduced to a bank for
the first time, there will be a reduction in the bank‟s loan book. However, the quality of
the loan book may either increase or deteriorate.
Thakor (1996) argued that in an environment with intense competition, a rise in the
minimum capital requirement ratios will result in high lending rates hence reduced
profitability. Therefore, banks will prefer to invest in government securities, which do not
require capital to be held against them.
Pasiouras et al. (2006) found that capital requirement ratio is negatively related to
stability of banks. However, Pasiouras (2009) undertook a similar research by using
various supervisory procedures that are used by the World Bank to study the technical
efficiency of banks. He collected data from 95 countries with a total of 715 banks in the
16
year 2003. He found out that there is a positive relationship between a bank‟s technical
efficiency and capital adequacy requirements.
Berger and Bonaccorsi di Patti (2006) studied the impact of capital ratios on profitability
on United States banks between 1995 and 2007. The study used both macroeconomic
factors and bank specific factors through the GMM system estimator. The results showed
a negative relationship between the capital ratios and profitability, thus supporting the
notion that banks fear to take additional risks when their capital is barely above the
regulatory minimum ratios. They therefore found that lower capital requirement ratios
increase the operating efficiency of banks.
Chortareas, Girardone and Ventouri (2012) used capital regulatory index to measure the
impact of capital requirements on operating efficiency of commercial banks in 22 EU
countries over the period 2000−2008. Their findings showed that increasing capital
requirements improves operating efficiency of banks.
Färe et al. (2004) also found that capital requirements can highly affect bank operating
efficiency. Altunbas et al. (2007) did a cross-country study of European banks. They
found that banks that hold huge capital are inefficient.
Odunga (2014) did a study on determinants of operating efficiency of Commercial Banks
in Kenya. Among the variables used was capital adequacy. He concluded that capital
affects operating efficiency for banks. He further states that banks need to increase their
capital so as to be able to invest in better ways of managing operational costs.
17
Odunga, Nyangweso and Nkobe (2013) did a study on Liquidity, Capital Adequacy and
Operating Efficiency of Commercial Banks in Kenya. They found out that commercial
banks with huge capital are more stable operationally and are able to withstand financial
shocks during distress period.
2.5 Summary of the Literature Review
The empirical studies reviewed literature on the work of past scholars in the area of
capital requirements and its effects on operating efficiency of Banks.
The empirical studies identifies that there exists a relationship between banks‟ operating
efficiency and capital levels. Therefore, it can be concluded from the above literature that
capital requirement regulation influences operating efficiency of commercial banks. The
implementation of stringent capital regulatory standards will help in ensuring that the
banking sector is more robust, ensuring that there is continuous supply of credit, thus
promoting the continued growth of an economy. Generally Policy makers and bank
managers are faced with the challenge of maintaining a balance between cost
management and stability. Thus, it is important to examine the effect of capital
requirement ratios on operating costs of commercial banks.
2.6 The Conceptual Framework
The objective of this research is to analyze the effects of capital requirements on
operating efficiency of commercial banks in Kenya. The study will adopt ratio analysis
using bank specific performance indicators; capital adequacy and relate it to operating
efficiency of the banks. Core Capital Ratio (CCR) is the ratio of a bank's core capital to
18
total risk weighted assets. Total Capital Ratio (TCRRWA) is the ratio of total capital to
total risk weighted assets. Equity Capital to Total Assets (ECTA) is the ratio of total
equity capital to total assets. This ratio is used as a measure for banks‟ capital structure.
This ratio is used to measure the leverage level of an institution. A deteriorating trend in
this ratio may be an indicator of increased risk exposure and possibly capital adequacy
difficulties. The figure below shows the Conceptual Framework of the study.
Independent variable Dependent variable
CCR
TCTRWA
ECTA
Operating Efficiency
19
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Introduction
This chapter illustrates how the research was carried out. It includes the research design,
area of study, population, sample size, data collection tools, data management and data
processing.
3.2 Research Design
According to Rubin et al. (2010), research design refers to the overall strategy to be
adopted for a particular project.
The study was carried out by using descriptive research design. Descriptive Research
design is a study in which the main emphasis is on describing linkages among variables.
The study is carried out in such a way that the relationship between each independent
variable and the dependent variable can be observed.
3.3 Target Population
This refers to the specific group that data will be collected from (Touliatos & Compton,
1988). The population of the study consisted of 41 commercial banks as at 31 December
2015. Imperial bank Ltd was not considered due to the fact that there is uncertainty in its
continuity and the fact that it is not actively dealing with customers or transacting since it
was put under receivership in October 2015.
20
3.4 Data Collection
For the purpose of examining the effects of capital requirements on operational costs of
Kenyan banks, the study used secondary data. Secondary data was collected from the
end-of-year audited financial statements for the period 2011 to 2015.
3.5 Data Analysis
This refers to the process of analyzing all the information collected and evaluating
relevant information that can be helpful in making better decision. The data was analyzed
by using correlation analysis and multiple regression analysis. The Eviews version 8
Software was used in data analysis because of its capability to handle multifaceted data
operations.
3.5.1 Analytical Model
The study used linear regression model of operating efficiency versus capital
requirements to test the relationship between the variables. The model treated operating
efficiency of commercial banks as dependent variable while independent variables were
bank capital requirements. The significance of each independent variable was tested.
Fischer distribution test called F- test was used to test the significance of the overall
model at a 95% confidence level.
21
A multiple linear regression analysis was used to estimate the relationship as follows:
Y = α + β1 X1 + β2 X2+ β3 X3 + έ
Where:
α= Constant Term
β1, β2, β3; are regression coefficients
ε = Error
Y = Bank operating Efficiency
X1= Core Capital to Risk weighted Assets Ratio
X2=Total Capital to Risk weighted Assets Ratio
X3=Equity Capital to Total Assets Ratio
Operating Efficiency (Y) = (Interest income + non-interest income + securities gains)/
(Interest expense + non- interest expense + provision for loan losses + taxes)
3.5.2 Tests of Significance
The coefficient of determination, R2, was used to explain the level of change in
dependent variable that is described by independent variables while significance of the
regression was tested by using F- test. 95% confidence level and 5% significant level was
used to test the study.
22
CHAPTER FOUR
DATA ANALYSIS, RESULTS AND DISCUSSION
4.1 Introduction
The results from the data collected and analyzed are presented in this chapter. Summary
tables have been used to present the results. Regression and correlations analysis were
performed. The results of the analysis were used to answer the research objective.
4.2 Results
The regression analysis was carried out by using measures of operating efficiency and
capital requirements. Test of significance was done for both the dependent and
independent variables at 95% significance level. Any p-value that is greater than 5% was
considered to have insignificant relationship with the dependent variable, otherwise the
relationship was considered significant. The adjusted R-squared was used to gauge the
degree of change of the dependent variable due to the changes in the independent
variables. The results are indicated in sections 4.3 and 4.4 while source data is presented
in a tabular format in appendices 2 and 3. Annual data for Operating efficiency and
capital adequacy ratios was used. All the 41 commercial banks provided adequate
information required.
23
4.3 Descriptive Analysis
This section provides the summary of the descriptive statistics of the panel data collected
for the study. Panel data allows for control of variables that change over time. The
summary statistics of the data is shown in table 1 below:
Table 1: Summary Statistics of the data
OE CCTRWA ECTA TCTRWA
Mean 1.337282 0.223615 0.158963 0.243669
Median 1.302792 0.184362 0.152780 0.210136
Maximum 2.808060 0.793427 0.726662 0.788690
Minimum 0.279256 0.060090 0.024538 0.091395
Standard Deviation 0.334200 0.122597 0.071453 0.116933
Skewness 0.604631 2.141036 3.854513 1.979434
Kurtosis 5.454470 8.715090 27.63900 7.881725
Sum 45.84106 274.1429 32.58742 49.95217
Observations 205 205 205 205
24
From the table above, the mean operating efficiency of all the banks stood at 1.3373 with
the lowest and highest ratios being 0.2793 and 2.8081 respectively. A mean of 1.3373
indicates that all banks during the period under study were able to finance entirely their
operating expenses from incomes made during the period of the study and still remained
with earnings for the shareholders.
The summary statistics in table 1 above shows that all the banks complied with the
statutory minimum capital requirements. The average for core capital ratio was 22.4%
while the lowest and highest ratios were 0.6% and 79.3% respectively against the
minimum statutory requirement of 10.5%. The average for total capital to total risk
weighted assets ratio for the banks was 24.4% while the lowest and highest ratios stood at
7.8% and 78.8% respectively against the statutory minimum requirement ratio of 14.5%.
The equity capital to total assets ratio of the banks was 15.9% on average with the lowest
and highest ratios being 3% and 72.7% respectively.
4.4 Quantitative Analysis and Relationship between Variables
4.4.1 Pearson and Spearman’s Correlations
Correlation coefficient (r) shows the relationship between the variables. Correlation
coefficients in a matrix fall between number 1 and -1. For the perfect positive linear
relationship between two variables, the correlation coefficient is 1 and for a perfect
negative linear relationship between two variables, the correlation coefficient is -1.
Where there is no relationship between the variables in a measure, the correlation
coefficient is zero.
25
The Pearson‟s correlation coefficient generated from the data is shown in table 2 below.
Table 2: Pearson's Correlation Coefficient
Pearson‟s Correlation Coefficient
OE CCTRWA ECTA TCRWA
OE 1
CCTRWA 0.794 1
ECTA 0.09417 0.6877 1
TCRWA 0.0047 0.9803 0.6532 1
From the table, all the factors have a positive correlation with operating efficiency. This
indicates that, the capital adequacy ratios have positive association with operating
efficiency of commercial banks in Kenya. Core capital and Equity capital have a strong
correlation with operating efficiency. This is according to the obtained coefficient of
0.794 and 0.9417 respectively indicating that the variables are strongly associated.
4.4.2 Data Analysis
Before analysis, data cleaning was done as part of data quality approaches of ensuring
data is fit for use. Data cleaning involved the detection of outliers in the data by checking
the patterns of the variables in the study. Duplicates were also identified and corrected.
Completeness of the data was checked by confirming that all values for variables that
were available were recorded. Fixed effect regression analysis was performed to evaluate
26
the relationships between the independent ratios and operating efficiency. With fixed
effects regression, the study used the changes in operating efficiency over time to
estimate the effects of the capital adequacy ratios on operating efficiency. Statistical
significance was tested by using an F- test of the overall fit and that of individual
parameters were tested using t- tests.
4.4.3 Hausman Test
This is where a fixed/random effects test is done using Hausman test. The null hypothesis
is that the random effects model is appropriate while the alternative hypothesis is that the
fixed effects model is appropriate. The decision rule was to reject the null hypothesis
when the p-value is less than 5% and accept it when the p-value is more than 5%.
Table 3: Correlated Random effects - Hausman Test results
Test summary Chi-Sq. Statistic Chi-Sq. d.f. Prob.
Cross-section random 9.990642 3 0.0186
27
Cross-section random effects test comparisons
Variable Fixed Random Var(Diff.) Prob.
CCTRWA 2.069842 1.859192 0.012307 0.0576
ECTA -0.634835 -0.513072 0.003683 0.0448
TCTRWA -0.927587 -0.866653 0.011039 0.5619
The Hausman test p-value was 1.8% which is less than 5%. Therefore, the null
hypothesis is rejected. Thus the fixed effects model was considered appropriate for the
study.
4.4.4 Fixed Effects Regression Analysis
The study used the fixed effects model to analyze the relationship and the effect of
independent variables on the dependent variable. The assumptions of the fixed effects
model work well with this study as opposed to the random effects model. Fixed effects
model allows for independence among the variables (the 41 commercial banks) by
allowing each of them to have its own intercept value. The intercept value may differ
across the commercial banks but it remains constant over time.
For random effects model, the variations across firms is assumed to be random and
uncorrelated with the predictor variables. Random effects model includes the between
entity error and within entity error with the assumption that entity„s error term is not
correlated with the predictors, which allows for time invariant variables to play a role as
28
explanatory variables. Random effects model allows for generalized inferences beyond
the sample used in the model.
As per the R generated below, the equation Y = α + β1 X1 + β2 X2+ β3 X3 + έ becomes:
OE = 1.2014 +2.0698*CCTRWA -0.9276*TCTRWA - 0.6348*ECTA
Table 4: Summary of fixed effects regression analysis
29
Dependent variable: OE
Method: Panel Least Squares
Date: 09/27/16 Time: 22:56
Period: 2011-2015
Number of observations: 43
Number of periods involved: 5
Number of Cross sections: 41
Number panel observations: 205
Coeff. Standard.
Error
t-stat Probability.
C 1.201374 0.040702 29.51651 0.0000
CCTRWA 2.069842 0.564519 3.666559 0.0003
ECTA -0.634835 0.274514 -2.312575 0.0220
TCTRWA -0.927587 0.560216 -1.655767 0.0997
30
Cross-sectional variables
R2
0.888176 Mean dependent variable 1.337282
Adjusted R2
0.858310 S.D. dependent variable 0.334200
Standard error 0.125798
Probability (F-statistic) 0.000000
F-stat 29.73868
From the above table the capital ratios significantly explain the variability in bank
operating efficiency since the p-value is 0.000 which is less than 5% indicating that the
model is strongly fitted. The model fit was tested by coefficient of determination R2. As
shown in the table above, the capital requirement ratios explain 88.8% of the changes in
operating efficiency. Therefore, the forecasting ability of the model is strong as variables
predict more than half of the changes in the dependent variable.
The coefficients of the intercept and independent variables all have p-values less than 5%
except for TCRWA which has more than 5% hence insignificant. The results show that
the dependent variable is positively related to CCTRWA and negatively related to ECTA
and TCTWA. The C in table 4 above is a constant representing where the regression line
intercepts the y-axis. It represents the operating efficiency when all other variables are at
zero. It has a p-value of 0.0000 hence significant.
The results show that there is a significant positive relationship between a firm‟s Core
Capital to Total Risk Weighted Assets ratio (CCTRWA) and operating efficiency since
the p-value is 0.0003, which is less than 5%. A unit increase in core capital to total risk
31
weighted assets ratio results to a 2.0698 increase in bank operational efficiency. The
results implied that core capital to total risk weighted assets ratio was positively
significant in influencing operating efficiency. Therefore, banks need to closely monitor
capital requirements ratio and particularly on core capital to total risk weighted assets
ratio so that they can invest in better ways of managing their operational costs. In
addition, the CBK should ensure that banks increase their core capital so as to be able to
withstand losses during periods of financial distress.
Further, the study shows an insignificant negative relationship between a firm‟s total
capital to total risk weighted assets and operating efficiency as indicated by the p-value of
0.0997. A unit increases in total capital to total risk weighted assets ratio results to a
0.92779 decrease in bank operational efficiency. Therefore banks need to meet the
minimum capital requirements set by CBK plus capital conservation buffer but should
not hold too much capital that is beyond the institution‟s business and risk profiles.
4.4.2 Robustness Check
This refers to the level to which variability of the dependent variable is explained by the
model used in analyzing the data. This is measured by the coefficient of determination R-
squared, R2, where 0< R2 < 1.
32
Table 5: Summary of fixed effects regression
R2
Adjusted
R2
S.E of estimate F-statistics
0.8882 0.8583 0.02136 0.0000
From the table above R2 is 88.8%. This means that 88.8% of change in operating
efficiency was explained by the changes in independent variables while remaining 11.2%
was caused by other factors that are not included in the model.
Table 6: Analysis of Variance
SUMMARY
Count Sum Average Variance
OE 205 274.143 1.33728 0.111689
CCTRWA 205 45.8411 0.22362 0.01503
TCTRWA 205 49.9522 0.24367 0.013673
ECTA 205 32.5874 0.15896 0.005106
33
ANOVA
df SS MS F Significance F
Regression 3 0.0048 0.0016 3.50627 0.003210
Residual 201 0.0178 0.00045
Total 204 0.0226
Analysis of Variance (ANOVA) is made up of of calculations that give information about
levels of variability within a regression model and form a basis for tests of significance.
From the table above the significance value is 0.003210 which is less than 0.05 hence the
model is statistically significant in predicting how capital requirement ratios affect
operating efficiency of commercial banks in Kenya.
34
CHAPTER FIVE
SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
5.1 Introduction
The results of the research as well as conclusions, limitations of the study and
recommendations for future research are presented in this chapter. Data on operating
efficiency, core capital to total risk weighted assets ratio, total capital to total risk weighted
assets ratio and equity capital to total assets ratio for the 41 commercial banks was collected
for the period 2011 to 2015 from annual audited financial statements. The research involved
the use of fixed effects regression analysis of operating efficiency as the dependent variable
while CCTRWA, TCTRWA and ECTA were the independent variables.
5.2 Summary
From the data analyzed, it was found that the fixed effects regression model used had a
forecast power above average as independent variables (capital ratios) explained more than
half of the changes in dependent variable as shown by R-squared of 88.8%. The overall
change in operating efficiency was described significantly since the model p- value was 0.000
which is less than 5%, showing that the model was strongly fit. From the data analysis in
chapter four, there exists a positive relationship between operating efficiency and capital
requirements of commercial banks in Kenya. The analysis showed that core capital to total
risk weighted assets ratio was the best measure for capital requirements influencing bank
operational efficiency. The ratio significantly influenced bank operating efficiency at p-value
= 0.0003 < 0.05.
35
The regression equation that estimates the relationship between operating efficiency and
capital requirements is as below.
OE = 1.2014 +2.0698*CCTRWA -0.9276*TCTRWA - 0.6348*ECTA
5.3 Conclusion
The data analysis results in chapter four indicate that capital requirements is one of the
determinants of operating efficiency of commercial banks in Kenya. The study findings
established that core capital to total risk weighted assets ratio has a strong positive
relationship with operating efficiency of commercial banks in Kenya. Total capital to total
risk weighted assets and equity capital to total assets ratio have negative relationship with
operating efficiency. Therefore, banks need to build up the level of capital requirement ratios
and more so on core capital to total risk weighted assets ratio so as to be able to improve their
operating efficiency. In addition, CBK should ensure that banks grow their core capital levels
so as to improve their efficiency since banks with adequate capital are able to invest in better
technology and provision of high quality customer services, hence increasing its efficiency.
5.4 Recommendation
The model revealed that, the higher the core capital of a bank the higher the operating
efficiency hence increased stability of a bank. Banks‟ stability is very important in any
economy because they support other sectors by lending to them. CBK and bank management
can use the findings to determine how much capital a bank should hold and how well a bank
can improve its efficiency. Bank managers should focus on factors that will help in reduction
of operational costs. Banks should not hold too little capital since it increases the possibility
36
of insolvency. On the other hand, too much capital imposes needless costs on banks and their
customers and might decrease the efficiency of a bank.
5.5 Limitations of the Study
The study carried out was for the period 2011-2015. This represents a limitation in case one
wants to establish the relationship in a different period.
The study focused only on the commercial banks in Kenya thus the results may not be
universal to all commercial banks across the globe but can be used as a reference to
commercial banks in East Africa countries.
The study used capital ratios only to measure bank efficiency. The inherent limitations on the
selected measures for capital requirements and operating efficiency may have an impact on
the deductions made from the research. The study did not undertake to establish which other
factors apart from the above affected financial performance. Other factors that could have
played a part in financial performance of the commercial banks, over the research period
present limitations on the findings for the study.
5.6 Suggestions for Further Studies
Since this study focused only on bank specific performance indicators, comparative studies
should be done on the determinants of banks operating efficiency using non-bank specific
performance indicators to gain better understanding of the determinants of bank„s operating
efficiency.
The study carried out was for the period 2011-2015. Similar studies can be carried on the
same topic but for a longer period. A similar study should also be carried out on the effect of
37
capital adequacy on operating efficiency of commercial banks in Kenya incorporating more
financial and accounting variables.
The study was carried on the Kenyan banking sector only. Similar studies should be done on
other countries for comparison purposes and to allow for generalization of findings on the
relationship between capital requirements and operating efficiency of commercial banks.
This study excluded other financial institutions in Kenya like insurance companies, SACCO‟s
and micro finance banks. The study recommends further research for these sectors to confirm
if there is indeed a relationship between capital requirements and operating efficiency in these
firms.
38
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42
APPENDICES
Appendix I: List of Commercial Banks in Kenya
1. KCB Kenya Ltd.
2. Co–operative Bank of Kenya Ltd
3. Equity Bank Kenya Ltd.
4. Standard Chartered Bank (K) Ltd
5. Barclays Bank Of Kenya Ltd
6. CFC Stanbic Bank (K) Ltd
7. Commercial Bank Of Africa Ltd
8. Diamond Trust Bank (K) Ltd
9. I&M Bank Ltd
10. NIC Bank Ltd
11. Chase Bank Ltd
12. Citibank N.A. Kenya
13. National Bank Of Kenya Ltd
14. Family Bank Ltd.
15. Bank of Baroda (K) Ltd
16. Bank of Africa (K) Ltd
17. Prime Bank Ltd
18. Housing Finance Ltd
19. Ecobank Kenya Ltd
20. Bank of India
21. Guaranty Trust Bank
22. Gulf African Bank
23. African Banking Corporation Ltd
24. Victoria Commercial Bank Ltd
25. K - Rep Bank Ltd
26. Giro Commercial Bank Ltd
27. Jamii Bora Bank Ltd
28. Fidelity Commercial Bank Ltd
29. Development Bank Of Kenya Ltd
30. Equatorial Commercial Bank Ltd
31. Guardian Bank Ltd
32. First Community Bank Ltd
33. Habib Bank A.G. Zurich
34. Consolidated Bank Of Kenya Ltd
35. Tran - National Bank Ltd
36. Paramount Universal Bank Ltd
37. Oriental Commercial Bank Ltd
38. Habib Bank Ltd
39. Credit Bank Ltd
40. Middle East Bank (K) Ltd
41. UBA Kenya Ltd
Appendix II: Operating Efficiency Ratio
NO. BANK 2011 2012 2013 2014 2015
1 Kenya Commercial Bank Ltd. 1.67554 1.49158 1.73145 1.37856 1.30467
2 Co-operative Bank of Kenya Ltd. 1.37588 1.31649 1.47039 1.36463 1.21977
3 Equity Bank Ltd 1.55080 1.72593 1.62644 1.77482 1.74539
4 Standard Chartered Bank (K) Ltd. 1.64124 1.78144 1.87703 1.71234 1.83550
5 Barclays Bank of Kenya 1.76897 1.75274 1.57692 1.53590 1.54231
6 CFC Stanbic Bank Ltd. 1.30917 1.61267 1.66869 1.61063 1.48244
7 Commercial Bank of Africa Ltd. 1.57677 1.51002 1.41745 1.36583 1.36144
8 Diamond Trust Bank (K) Ltd. 1.53021 1.61343 1.65093 1.62626 1.51881
9 I&M Bank Ltd 1.93992 1.55167 1.77978 1.57921 1.65800
10 NIC Bank Ltd 1.68659 1.71195 1.67754 1.65521 1.49451
11 Chase Bank Kenya Ltd 1.26257 1.30300 1.32492 1.37574 0.94244
12 Citibank N.A. Kenya Ltd. 2.62036 2.80806 2.23757 1.88818 2.23399
13 National Bank Of Kenya Ltd 1.41071 1.22851 1.18182 0.91575 0.93808
14 Family Bank Ltd. 1.14006 1.37939 1.28624 1.32340 1.29014
15 Bank of Baroda (K) Ltd 1.46657 1.36661 1.65138 1.61684 1.69268
16 Bank of Africa (K) Ltd 1.18587 1.21074 1.22478 0.83293 1.29369
17 Prime Bank Ltd 1.38287 1.24888 1.47933 1.51106 1.46751
18 Housing Finance Ltd 1.35114 1.20297 1.26781 1.22938 1.24659
19 Ecobank Kenya Ltd 1.03804 0.56272 0.73989 0.89300 1.01716
20 Bank of India 1.71266 1.24746 1.65282 1.59126 1.58784
43
NO. BANK 2011 2012 2013 2014 2015
21 Guaranty Trust Bank 1.20072 1.15728 1.20602 1.30972 1.19440
22 Gulf African Bank Ltd 1.14531 1.27865 1.30279 1.36994 1.49812
23 African Banking Corporation Ltd 1.42440 1.25923 1.26090 1.11897 1.12670
24 Victoria Commercial Bank Ltd 1.63412 1.44242 1.59308 1.47481 1.35360
25 K-Rep Bank Ltd 1.16312 1.16460 1.15793 1.31383 1.18412
26 Giro Commercial Bank Ltd 1.32793 1.12814 1.31008 1.36368 1.31674
27 Jamii Bora Bank Ltd 0.80190 1.22344 1.13879 1.07367 1.01618
28 Fidelity Commercial Bank Ltd 1.28018 1.09712 1.20358 1.15663 0.89126
29 Development Bank Of Kenya Ltd 1.15697 1.07655 1.19342 1.20634 1.10373
30 Equatorial Commercial Bank Ltd 1.25255 0.77545 1.07891 0.54818 1.21182
31 Guardian Bank Ltd 1.17989 1.15341 1.16393 1.16992 1.17901
32 First Community Bank Ltd 1.14005 1.34269 1.18849 1.07648 1.08670
33 Habib Bank A.G. Zurich 1.52006 1.58314 1.63214 1.49330 1.34235
34 Consolidated Bank Of Kenya Ltd 1.12960 1.06296 0.95080 0.98205 0.92085
35 Tran - National Bank Ltd 1.41947 1.26487 1.20812 1.15186 1.14730
36 Paramount Universal Bank Ltd 1.23209 1.11569 1.09809 1.05448 0.90969
37 Oriental Commercial Bank Ltd 1.45894 1.10236 1.26112 1.28886 1.33671
38 Habib Bank Ltd 1.88962 1.90781 2.09130 1.77164 1.80465
39 Credit Bank Ltd 1.05798 1.08982 1.07509 0.92988 0.88805
40 Middle East Bank (K) Ltd 1.21104 1.15857 1.08433 1.04425 1.01478
41 Uba Kenya Ltd 0.70639 0.82054 0.71894 0.55418 0.27926
44
Appendix III: Capital Requirements Ratios
BANK YEAR CCTRWA TCTRWA ECTA
Kenya Commercial Bank Ltd. 2011 20% 21% 16%
2012 19% 20% 17%
2013 23% 28% 19%
2014 17% 21% 19%
2015 14% 15% 17%
Co-operative Bank of Kenya Ltd. 2011 16% 16% 12%
2012 18% 21% 14%
2013 20% 27% 16%
2014 13% 20% 15%
2015 15% 21% 14%
Equity Bank Ltd 2011 15% 22% 20%
2012 19% 29% 20%
2013 19% 24% 21%
2014 15% 17% 15%
2015 15% 16% 14%
Standard Chartered Bank (K) Ltd. 2011 12% 14% 14%
2012 16% 18% 17%
2013 17% 21% 18%
2014 16% 20% 20%
2015 18% 21% 20%
Barclays Bank of Kenya 2011 24% 28% 17%
2012 22% 25% 15%
2013 22% 23% 15%
2014 16% 16% 17%
2015 16% 18% 16%
CFC Stanbic Bank Ltd. 2011 13% 19% 7%
2012 21% 30% 13%
2013 25% 29% 13%
2014 18% 21% 15%
2015 16% 19% 14%
Commercial Bank of Africa Ltd. 2011 14% 15% 12%
2012 14% 14% 12%
2013 16% 17% 11%
2014 11% 18% 10%
2015 12% 18% 11%
45
BANK YEAR CCTRWA TCTRWA ECTA
Diamond Trust Bank (K) Ltd. 2011 14% 17% 13%
2012 15% 18% 16%
2013 18% 21% 16%
2014 17% 19% 18%
2015 14% 17% 16%
I&M Bank Ltd 2011 18% 19% 18%
2012 16% 16% 18%
2013 17% 22% 19%
2014 16% 19% 16%
2015 17% 19% 18%
NIC Bank Ltd 2011 15% 16% 13%
2012 16% 16% 15%
2013 15% 16% 16%
2014 14% 21% 16%
2015 15% 20% 17%
Chase Bank Kenya Ltd 2011 11% 13% 7%
2012 13% 14% 10%
2013 14% 15% 9%
2014 14% 15% 9%
2015 9% 15% 8%
Citibank N.A. Kenya Ltd. 2011 31% 31% 20%
2012 36% 36% 25%
2013 35% 35% 22%
2014 27% 27% 23%
2015 27% 28% 22%
National Bank Of Kenya Ltd 2011 28% 29% 15%
2012 25% 26% 15%
2013 22% 23% 12%
2014 13% 14% 10%
2015 13% 14% 9%
Family Bank Ltd. 2011 16% 17% 13%
2012 23% 24% 16%
2013 18% 19% 14%
2014 20% 20% 17%
2015 15% 19% 15%
Bank of Baroda (K) Ltd 2011 20% 21% 13%
2012 20% 21% 13%
2013 24% 25% 15%
2014 23% 24% 16%
2015 26% 27% 17%
46
BANK YEAR CCTRWA TCTRWA ECTA
Bank of Africa (K) Ltd 2011 13% 16% 12%
2012 10% 13% 10%
2013 11% 13% 12%
2014 12% 16% 13%
2015 13% 16% 12%
Prime Bank Ltd 2011 16% 16% 11%
2012 17% 17% 10%
2013 18% 18% 12%
2014 17% 17% 14%
2015 17% 17% 13%
Housing Finance Ltd 2011 21% 34% 15%
2012 20% 30% 12%
2013 16% 25% 12%
2014 11% 15% 10%
2015 15% 18% 13%
Ecobank Kenya Ltd 2011 15% 26% 6%
2012 19% 29% 2%
2013 24% 33% 6%
2014 25% 29% 17%
2015 21% 23% 14%
Bank of India 2011 45% 46% 14%
2012 36% 37% 16%
2013 50% 51% 17%
2014 39% 39% 18%
2015 24% 25% 17%
Guaranty Trust Bank 2011 16% 19% 10%
2012 13% 16% 11%
2013 31% 33% 24%
2014 25% 26% 22%
2015 27% 28% 27%
Gulf African Bank Ltd 2011 14% 14% 10%
2012 14% 14% 11%
2013 21% 22% 17%
2014 13% 14% 16%
2015 16% 16% 16%
African Banking Corporation Ltd 2011 17% 18% 14%
2012 12% 13% 11%
2013 14% 15% 12%
2014 11% 17% 12%
2015 12% 16% 13%
BANK YEAR CCTRWA TCTRWA ECTA
Victoria Commercial Bank Ltd 2011 21% 22% 16%
2012 23% 24% 20%
2013 20% 20% 18%
2014 18% 19% 17%
2015 19% 19% 17%
K - Rep Bank Ltd 2011 19% 20% 14%
2012 22% 22% 16%
2013 20% 22% 16%
2014 20% 21% 15%
2015 24% 25% 20%
Giro Commercial Bank Ltd 2011 23% 24% 13%
2012 26% 27% 14%
2013 28% 29% 15%
2014 23% 24% 16%
2015 23% 24% 18%
Jamii Bora Bank Ltd 2011 50% 50% 73%
2012 79% 69% 58%
2013 29% 29% 32%
2014 26% 27% 24%
2015 15% 16% 19%
Fidelity Commercial Bank Ltd 2011 14% 15% 9%
2012 15% 16% 10%
2013 18% 19% 11%
2014 15% 16% 10%
2015 16% 18% 12%
Development Bank Of Kenya Ltd 2011 25% 27% 14%
2012 20% 24% 12%
2013 22% 24% 12%
2014 26% 30% 16%
2015 24% 27% 17%
Equatorial Commercial Bank Ltd 2011 13% 14% 9%
2012 6% 9% 6%
2013 11% 13% 9%
2014 7% 11% 7%
2015 14% 17% 14%
Guardian Bank Ltd 2011 18% 18% 12%
2012 16% 16% 11%
2013 18% 18% 12%
2014 16% 17% 12%
2015 18% 18% 14%
BANK YEAR CCTRWA TCTRWA ECTA
First Community Bank Ltd 2011 14% 14% 9%
2012 14% 14% 11%
2013 13% 13% 11%
2014 11% 11% 10%
2015 11% 15% 11%
Habib Bank A.G. Zurich 2011 36% 37% 15%
2012 50% 51% 16%
2013 56% 57% 16%
2014 36% 37% 18%
2015 26% 27% 18%
Consolidated Bank Of Kenya Ltd 2011 11% 13% 9%
2012 11% 15% 8%
2013 7% 11% 7%
2014 8% 11% 10%
2015 8% 9% 11%
Tran - National Bank Ltd 2011 46% 47% 24%
2012 35% 36% 21%
2013 30% 31% 19%
2014 21% 22% 19%
2015 20% 21% 19%
Paramount Universal Bank Ltd 2011 53% 54% 22%
2012 46% 47% 16%
2013 40% 41% 15%
2014 24% 25% 13%
2015 23% 24% 15%
Oriental Commercial Bank Ltd 2011 34% 35% 26%
2012 28% 30% 22%
2013 29% 30% 22%
2014 25% 26% 21%
2015 33% 34% 26%
Habib Bank Ltd 2011 33% 34% 18%
2012 41% 42% 19%
2013 44% 46% 20%
2014 31% 33% 20%
2015 32% 37% 21%
Credit Bank Ltd 2011 29% 30% 18%
2012 30% 30% 19%
2013 24% 26% 17%
2014 16% 17% 13%
2015 14% 15% 13%
BANK YEAR CCTRWA TCTRWA ECTA
Middle East Bank (K) Ltd 2011 43% 44% 24%
2012 39% 40% 18%
2013 35% 36% 20%
2014 33% 34% 21%
2015 33% 33% 22%
UBA Kenya Ltd 2011 69% 70% 23%
2012 78% 79% 39%
2013 72% 73% 42%
2014 58% 59% 24%
2015 24% 24% 14%
50
