Determining the Effect of Prudential Regulations on Financial Performance of Commercial Banks in Kenya

Commercial banks play a crucial role in the allocation and dissemination of a nation’s economic resources. To maintain a sound banking sector, it is essential for these institutions to adhere to prudential regulations concerning liquidity, asset quality, and capital. The Kenyan banking sector has recently faced declining financial performance, prompting the need for further study on the impact of prudential regulations. This research aimed to determine the effect of these regulations on the financial performance of Kenyan commercial banks, focusing specifically on capital, credit, and liquidity regulations. The study examined all 41 Kenyan commercial banks from 2015 to 2021 to analyze the relationship between prudential regulations (capital, credit, and liquidity) and financial performance. This comprehensive coverage ensured accurate analysis, capturing the full scope of relevant data from all key players in the sector. The findings indicated that capital regulation had a positive but insignificant effect on financial performance, while credit regulation had a significant negative impact. Liquidity regulation showed an insignificant negative effect on financial performance. Moreover, interest rates were found to moderately affect the relationship between prudential regulations and financial performance, with an inverse and insignificant influence. The study recommends that commercial banks devise policies to enhance the effectiveness of capital regulations in improving financial performance.