CAPITAL ADEQUACY AND PERFORMANCE OF LISTED COMMERCIAL BANKS IN KENYA BY FAITH M. KIMEU UNITED STATES INTERNATIONAL UNIVERSITY-AFRICA SUMMER 2020 CAPITAL ADEQUACY AND PERFORMANCE OF LISTED COMMERCIAL BANKS IN KENYA BY FAITH M. KIMEU A Research Project Report Submitted to the Chandaria School of Business in Partial Fulfillment of the Requirements for the Degree of Masters in Business Administration (MBA) UNITED STATES INTERNATIONAL UNIVERSITY-AFRICA SUMMER 2020 STUDENT’S DECLARATION I, the undersigned, declare that this is my original work and has not been submitted to any other college, institution or university other than the United States International University in Nairobi for academic credit. Signed: __________________________ Date: _____________________________ Faith Kimeu- (ID 656550) This research project has been submitted for examination with my approval as the appointed supervisor. Signed: __________________________ Date: _____________________________ Dr. Francis Gatumo Signed: __________________________ Date: _____________________________ Dean, Chandaria School of Business ii COPYRIGHT All rights reserved. No part of this project proposal may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without the permission from the author. ©Faith Kimeu 2020. iii ABSTRACT The purpose of the study was to determine the effects of capital adequacy on performance of listed commercial banks in Kenya. The study was guided by two specific research objectives which were to establish the effect of core capital on performance of listed commercial banks in Kenya, and to determine the effect of supplementary capital on performance of listed commercial banks in Kenya. The study focused specifically on listed commercial banks in Kenya. The study used descriptive and explanatory research designs. The target population of the study was eleven (11) listed commercial banks. The study took a census survey of the 11 listed commercial banks in the Nairobi Securities Exchange (NSE) between year 2014 to 2018. The study used secondary data sources including both published income statements and statements of financial position from which data on core capital, supplementary capital and ROA were recorded. The data was collected by the use of a data collection sheet and analyzed by both descriptive and inferential statistics. Regression analysis was used to describe the degree of relationship between the variables used in the study. Results show that average core capital among listed commercial banks in Kenya had been on a steady rise across the 5-year period. A declining trend was however observed in supplementary capital over the same period. The study concluded that core capital has a significant effect on financial performance. However, supplementary capital does not have a significant effect on financial performance among commercial banks listed on NSE. The study recommends that each bank need to increase their core capital to drive up performance and survive in the market. Mergers and acquisition strategy should be adopted to observe high supplementary capital relative to core capital to prevent investors from risks. The banks should also set a benchmark within Kenya bankers association regulation which will help managers to improve and grow their capital base to have effective performance in their banks hence translating maximization of shareholders’ wealth. iv ACKNOWLEDGEMENT I wish to thank the almighty God for the gift of life and good health to undertake and complete the masters programme. My most sincere gratitude goes to my supervisor: Dr. Francis Gatumo for his guidance and friendly advice throughout the project. I express my thanks to classmates, friends and family members for always believing in me. v DEDICATION I dedicate this research project to my dearest husband George: who is and will always be my role model. Thank you for the sacrifices you have made so that I could get the best education. I appreciate you and may God bless you. For my daughters, Tamara, Talia and Tatiana, thank you for making my world beautiful. vi TABLE OF CONTENTS STUDENT’S DECLARATION ........................................................................................ ii COPYRIGHT ................................................................................................................... iii ABSTRACT ...................................................................................................................... iv ACKNOWLEDGEMENT ................................................................................................ v DEDICATION .................................................................................................................. vi TABLE OF CONTENTS ................................................................................................ vii LIST OF TABLES ............................................................................................................ ix LIST OF FIGURES ........................................................................................................... x LIST OF ACRONYMS .................................................................................................... xi CHAPTER ONE ................................................................................................................ 1 INTRODUCTION ............................................................................................................. 1 1.1 Background of the Study ............................................................................................... 1 1.2 Statement of the Problem .............................................................................................. 7 1.3 General Objective .......................................................................................................... 7 1.4 Specific Objectives ........................................................................................................ 8 1.5 Justification of the Study ............................................................................................... 8 1.6 Scope of the Study ......................................................................................................... 8 1.7 Definition of Terms ....................................................................................................... 9 1.8 Chapter Summary ........................................................................................................ 10 CHAPTER TWO ............................................................................................................. 11 LITERATURE REVIEW ............................................................................................... 11 2.1 Introduction ................................................................................................................. 11 2.2 Core Capital and Performance of Commercial Banks................................................. 11 2.3 Supplementary Capital and Financial Performance .................................................... 17 2.4 Chapter Summary ........................................................................................................ 23 CHAPTER THREE ......................................................................................................... 24 RESEARCH METHODOLOGY .................................................................................. 24 3.1 Introduction ................................................................................................................. 24 3.2 Research Design .......................................................................................................... 24 3.3 Population and Sampling Design ................................................................................ 24 3.4 Data Collection Methods ............................................................................................. 26 3.5 Research Procedures .................................................................................................... 26 3.6 Data Analysis method .................................................................................................. 26 vii 3.7 Chapter Summary ........................................................................................................ 27 CHAPTER FOUR ........................................................................................................... 28 RESULTS AND FINDINGS ........................................................................................... 28 4.1 Introduction ................................................................................................................. 28 4.2 Effect of Core Capital on Financial Performance ....................................................... 28 4.3 Effect of Supplementary Capital on Financial Performance ....................................... 32 4.4 Chapter Summary ........................................................................................................ 36 CHAPTER FIVE ............................................................................................................. 37 DISCUSSION, CONCLUSIONS AND RECOMMENDATIONS .............................. 37 5.1 Introduction ................................................................................................................. 37 5.2 Summary .....................................................................................................................