Regulatory Reforms Affecting the Performance of Banking Industry in Kenya

  • CPA Sally Jepkoir Rono Jomo Kenyatta University of Agriculture and Technology
  • Dr. Kimutai Jomo Kenyatta University of Agriculture and Technology


Regulations and guidelines issued by the Central Bank of Kenya subject banks to certain requirements, restrictions and guidelines. This regulatory structure creates transparency between banking institutions and the individuals and corporations with whom they conduct business, among other things. The special role that banks play in the economic system implies that banks should be regulated and supervised not only to protect investors and consumers but also to ensure systemic stability. More specifically, bank regulations exist for safeguarding the industry against systemic risk, protecting consumers from excessive prices or opportunistic behaviour and finally to achieve some social objectives, including stability. The research gap was based on the observation that there exists conflicting evidence of the effect of regulations on the bank financial performance.  For many years, the banks have defied all efforts to lower the prohibitive interest rates and destroyed many businesses while they earned staggering profits, even in the worst of our economic times. After the 2008 global financial crises, many countries moved to limit the self-regulation and market liberalisation of the financial sector to protect consumers. The study was based on the four objectives: to investigate the effect of capital requirement /liquidity on banks profitability; to establish effect of credit and interest rate on the banks profitability; to examine the effect of reserve requirement on the banks performance and lastly to determine the effect of financial reporting on banks profitability. The theories that informed the study included agency theory, economic theory and liquidity theory. The paper used a qualitative research design where journals, books and publications related to the research area were reviewed. The paper used content analysis as its analytical framework. The study found capital requirement may not explain the financial performance due to the fact that the total asset increases more than the equity of the commercial banks and this can lead to the to the low rate of profitability of the commercial banks. It was established that liquidity ratio does not at all explain financial performance of commercial Banks in Kenya. The studies revealed an increase of net loans compared to the short-term borrowing. Higher figures denote lower liquidity. The negative relationship between financial reporting and disclosures and financial performance is most likely to have been resulted from the increase of banks put under receivership. The most important minimum requirement in banking regulation is maintaining minimum capital ratios. There is an association between regulatory reforms and bank performance or profitability.

Keywords: Regulatory Reforms, Capital Base, Return on Assets, Interest Rates, Capital Flows, Banks’ Profitability

Author Biographies

CPA Sally Jepkoir Rono , Jomo Kenyatta University of Agriculture and Technology

PhD Candidate, Business Administration Finance, Jomo Kenyatta University of Agriculture and Technology

Dr. Kimutai, Jomo Kenyatta University of Agriculture and Technology

Lecturer, Jomo Kenyatta University of Agriculture and Technology


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How to Cite
Rono , S. J., & Kimutai. (2022). Regulatory Reforms Affecting the Performance of Banking Industry in Kenya. Journal of Public Policy & Governance, 6(1), 107 - 115.