Liquidity Risks as a Determinant of Capital Adequacy of Commercial Banks in Kenya

Author(s)

Fredrick Ambale Mugwanga , Dr. Fredrick Kogilo ,

Download Full PDF Pages: 18-25 | Views: 12 | Downloads: 6 | DOI: 10.5281/zenodo.10610671

Volume 13 - January 2024 (01)

Abstract

A bank's financial strength is evaluated by the capital adequacy (CA), which makes use of both its capital and assets. It is employed to safeguard depositors and advance the global financial systems' efficiency and stability. This study used Multiple Linear Regression Analysis and the Correlation Coefficient (Pearson Correlation) to assess whether liquidity risks are among the most significant factors that predict Capital Adequacy of Commercial Banks in Kenya for the period 2009–2013. During the five years from 2009 to 2013, all Kenyan commercial banks that were registered made up the target population. Secondary data was used from Nairobi Securities Exchange for listed banks and management of banks that are not listed. Following the financial crisis of the 2007-2009, stringent regulatory measures, such as higher capital requirements have become more prominent as a move towards having stable and more competitive banking sector. Banks play a critical role in the allocation of society’s limited savings among the most productive investments, and they facilitate the efficient allocation of the risks of those investments. Data analysis results showed the existence of a non-significant direct relationship between liquidity risk and commercial banks capital adequacy at (α = 0.05), where (t) value was (0.167) and (α = 0.868), but Pearson correlation coefficient was (0.017).  This implies that when liquidity risk is high capital adequacy is low. The study's recommendations are based on the findings, and financial statements and data reports should include the guidelines and foundation for capital adequacy measurement.This will increase public awareness of banking and finance and strengthen banks' ability to compete with regional and global banks.

Keywords

Liquidity Risks, Capital Adequacy

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