The Distressing Effect of Financial Performance on Capital Adequacy of Commercial Banks in Kenya

Abstract

Capital adequacy is a ratio necessary when identifying financial distress risk level of financial institutions in Kenya specifically commercial banks in Kenya. Financial distress and capital adequacy have been discussed separately in details but not as satisfactorily this is because of its role to profitability and distress risk levels of commercial banks. This study sought to examine the distressing effect of financial performance on adequacy of capital for Kenyan commercial banks. Financial performance was represented by two variables; ROA and ROE. Thirty eight Kenyan commercial banks were used for analysis for a period of 11 years (2005-2015). Financial statements of commercial banks from CBK was used to extract secondary data for analysis. Results indicated that there are various signals of relationships between financial performance and capital adequacy in respect to financial distress risk level. A correlation and panel regression analysis were carried out mainly to measure the relationship between capital adequacy and financial performance, the outcome of the study indicated a negative relationship between financial performance and capital adequacy. This study clearly gives a mindful and sense of reference to the depositor, all banking institutions including the commercial banks and policy makers to maintain proper levels of capital.

Keywords: financial performance, capital adequacy ratio, commercial banks, financial distressing factor.