Effect Of Increasing Core Capital On The Kenyan Banking Sector Performance

ABSTRACT

The Kenya Vision 2030 envisions a globally competitive financial sector and proposes transforming the banking sector to have fewer, stronger and larger scale banks. In this regard, the National Treasury proposed and implemented an increase in the minimum core capital requirement in 2008 and proposed a further increase in 2015 and 2016 to improve competition in the banking sector, increase the level of savings in the economy and strengthen banks. This study sought to find out the effect of the 2008 increase in the minimum core capital requirement from Kshs.250 million to Kshs.1 billion on bank performance in the Kenyan banking sector. The specific variables that were studied to evaluate their impact on bank performance following an increase in core capital were competition and profitability. The study focused on the Kenyan banking sector from 2003 to 2016 and adopted an exploratory study approach. The research relied on secondary data from CBK and therefore took a quantitative approach. The entire population of 39 banks as provided by the CBK as at 31st December 2016 was studied. The study was conducted according to the three peer group classification provided by CBK as presented in Appendix B. The paired t-test was used to evaluate whether there was a change in competition and profitability pre and post increase in the minimum core capital requirement. Regression models were further included to assess the strength of the relationship between the dependent variables competition and profitability and the independent variable core capital and control variables total deposits, profits before tax, inflation and GDP. Results indicate that the regulatory increase in the core capital requirement had an inconsistent effect on profitability and competition in the three banking peer groups. In particular, as indicated by the paired t-test, there was no statistically inferred difference for both competition and profitability in all the three peer groups except for competition in peer group one. The policy recommendation arising from this study is for the regulator to have similar policies for the entire industry as well as different policies tailored for each peer group to increase the attainment of desired outcome of regulation.