Capital Adequacy Ratios as Predictors of Financial Distress in Kenyan Commercial Banks

Abstract

The study sought to investigate the efficacy of capital adequacy ratios as predictors of financial distress in Kenyan commercial banks. The study was based on a positivism research paradigm using a descriptive research design. The population of the study was drawn from 43 commercial banks operating in Kenya over the period 2009-2015. Data were collected using data collection sheets from annual reports of commercial banks. Collected data were analyzed using stepwise logistic regression. Hypothesis testing was done at 0.05 significance levels. The study found that capital adequacy ratios were significant predictors of financial distress in commercial banks in Kenya. Core capital to total deposits: coefficient = 0.249 and P Value = 0.026, core capital to total risk weighted assets: coefficient = −0.419, P Value = 0.007 and total capital to total risk weighted assets: coefficient = 0.320, P Value = 0.017 were all significant predictors of financial distress in commercial banks. The null hypothesis: capital adequacy ratios were significant predictors of financial distress was accepted. The study concluded that capital adequacy ratios were significant predictors of financial distress in commercial banks. Consequently, the study recommended that, there be introduced a continuous industry driven regulatory and reporting structure on capital adequacy for commercial banks.

Effect of Camel Variables on Financial Stability: A Dynamic Panel Analysis of Commercial Banks in Kenya

“…The results were also consistent with those of Gudmundsson et al 2013, Githinji and Njuguna (2016), Oduora, Ngokab and Odongoba (2017). However, the findings were inconsistent with those of Dickson and Marobhe (2013), Karugu, Achoki and Kiriri (2018). The inconsistency in the former study could be due to differences in markets while the latter could be due to contextual differences.…”

“…Furthermore, the present study used the GMM model. Karugu, Achoki and Kiriri (2018) examined the effect of capital adequacy ratios on financial stability of commercial banks in Kenya. Core capital to total deposits, total capital to total risk weighted assets and core capital to total weighted assets were employed as the explanatory variable while Z-index was utilized as the proxy to financial stability of commercial banks in Kenya.…”

أثر التعثر المالی وحجم الشرکة وجودة المراجعة علی إدارة الأرباح -دراسة تطبیقیة علی الشرکات المقیدة بالبورصة المصریة(باللغة الانجلیزیة)

“…The specific risk factors are depending on the results of the empirical studies done in different markets (Karugu et al, 2018;Kamaluddin et al, 2019).…”

“…These forms are all to be considered as internal risk factors that may lead to financial distress. On the other hand, there are other external risk factors that are out of the firm's management control like pandemic, worldwide recession and political troubles Karugu et al, 2018).…”

“…As high level of leverage resulted from the lack of cashflow available for running the operations of the business and that prevent the business from paying their commitments and that lead to window dressing activities. Karugu et al, (2018), mention that most of the financial distress cases are in the developing or transitional economies countries where they face insolvency, low liquidity and lack of cash flow. He related the financial distress cases with the high leverage level of companies with no future plans to handle this issue.…”