IMPACT OF CAPITAL ADEQUACY, CREDIT RISK MANAGEMENT AND STAFF COMPETENCE ON BANK FAILURE IN KENYA (1993-2016)
Article Sidebar
Published
Mar 27, 2026
Main Article Content
Abstract
Bank failures pose a significant challenge to the stability of the financial sector and have profound implications for both the economy and regulatory authorities. In an attempt to address these challenges, this study focuses on the internal determinants of bank failure. Specifically, the research examines how three bank-specific factors, which include capital adequacy, credit concentration, and staff competencies, impacted bank failures in Kenya between 1993 and 2016. A mixed methods approach was employed, combining secondary data from the Central Bank of Kenya and from 24 failed banks through directed content analysis of published supervisory reports, with primary data collected through interviews with regulatory officials. Multiple regression analysis was used to evaluate the influence of the three variables on bank failure, measured by deviation from the 20 per cent regulatory liquidity threshold. The results indicated that capital adequacy had a statistically significant negative relationship with bank failure (β = −8.561, p = 0.036), showing that well-capitalised banks were less prone to collapse. In contrast, credit concentration had a positive and statistically significant effect (β = 15.318, p < 0.001), indicating that more concentrated loan portfolios were associated with greater failure severity. Staff competencies exhibited a negative but statistically insignificant effect (β = −6.264, p = 0.122); therefore, this variable did not show an independent stabilising impact in this analysis model. The study concludes that capital buffers and staff capabilities are critical in preventing institutional failure and recommends enhanced regulatory enforcement, capacity building, and targeted improvements in credit oversight to foster greater resilience in Kenya’s banking sector.
Article Details
Issue
Section
Articles
References
Adeyemi, K. S. (2011). Bank failures in Nigeria: A consequence of capital inadequacy. Journal of Accounting and Taxation, 3(2), 1–7. https://doi.org/10.5897/JAT.9000017
Barrell, R., Davis, E. P., Karim, D., & Liadze, I. (2010). Bank regulation, property prices and early warning systems for banking crises in OECD countries. Journal of Banking & Finance, 34(9), 2255-2264.
Beck, T., Demirgüç-Kunt, A., & Levine, R. (2003). Law and finance: Why does legal origin matter? Journal of Comparative Economics, 31(4), 653-675. https://doi.org/10.1016/j.jce.2003.08.001
Beck, T., Demirgüç-Kunt, A., & Levine, R. (2006). Bank concentration, competition, and crises: First results. Journal of Banking & Finance, 30(5), 1581-1603. https://doi.org/10.1016/j.jbankfin.2005.05.010
Bertay, A. C., Demirgüç-Kunt, A., & Huizinga, H. (2013). Do we need big banks? Evidence on performance, strategy and market discipline. Journal of Financial Intermediation, 22(4), 532-558.
Brownbridge, M. (1998). The impact of banking sector reforms on the stability of African economies. Development Studies Research, 24(1), 45–67.
Central Bank of Kenya. (1993–2016). Annual Bank Supervision Reports. https://www.centralbank.go.ke
Central Bank of Kenya. (2013). CBK's Risk-Based Supervision Framework – May 2013. https://www.centralbank.go.ke/wp-content/uploads/2016/08/CBKs-Risk-Based-Supervision-Framework-May-2013-1.pdf
Central Bank of Kenya. (2013). Prudential Guidelines for Institutions Licensed under the Banking Act. https://www.centralbank.go.ke/wp-content/uploads/2016/08/PRUDENTIAL-GUIDELINES.pdf
Central Bank of Kenya. (2013). Risk Management Guidelines – January 2013. https://www.centralbank.go.ke/wp-content/uploads/2016/08/risk-management-guidelines-january-20131.pdf
Central Bank of Kenya. (2016). Draft Guidance Note on Internal Capital Adequacy Assessment Process (ICAAP). https://centralbank.go.ke/images/docs/legislation/DraftGuidanceNoteonICAAP.PDF
Central Bank of Kenya. (2020). Banking Circular No. 11 of 2020 – Internal Capital Adequacy Assessment Process (ICAAP). https://www.centralbank.go.ke/uploads/banking_circulars/1925129366_Banking%20Circular%20No.%2011%20of%202020%20-%20Internal%20Capital%20Adequacy%20Assessment%20Process%20%28ICAAP%29%20-%20Aug%2014%20%202020.pdf
Central Bank of Kenya. (2023). Bank Supervision Annual Report 2022. https://www.centralbank.go.ke/2023/05/15/bank-supervision-annual-report-2022/
Central Bureau of Statistics of Kenya. (2002). Economic survey 2002. Government Printer.
Cheserek, B. K. (2007). The determinants of bank failures: A survey of commercial banks in Kenya [Unpublished MBA project]. University of Nairobi. https://erepository.uonbi.ac.ke/handle/11295/7842
DeYoung, R., & Roland, K. P. (2001). Product mix and earnings volatility at commercial banks: Evidence from a degree of total leverage model. Journal of Financial Intermediation, 10(1), 54-84.
Estrella, A., Park, S., & Peristiani, S. (2000). Capital ratios as predictors of bank failure. Economic Policy Review, 6(2), 33–52. https://www.newyorkfed.org/medialibrary/media/research/epr/00v06n2/0007este.pdf
Fofack, H. (2005). Non-performing loans in sub-Saharan Africa: Causal analysis and macroeconomic implications. World Bank Policy Research Working Paper, No. 3761. https://doi.org/10.1596/1813-9450-3761
Gathaiya, R. N. (2017). Analysis of issues affecting bank failures in Kenya. International Journal of Management and Business Studies, 7(3), 1–15. https://www.ripublication.com/ijmbs17/ijmbsv7n3_01.pdf
Goodhart, C. A. (2008). The regulatory response to the financial crisis. Journal of Financial Stability, 4(4), 351-358.
Gorton, G., & Winton, A. (2003). Financial intermediation. In G. M. Constantinides, M. Harris, & R. M. Stulz (Eds.), Handbook of the Economics of Finance (Vol. 1, pp. 431-552). Elsevier. https://doi.org/10.1016/S1574-0102(03)01012-4
Gudmundsson, R., Ngoka-Kisinguh, K., & Odongo, M. T. (2013). The role of capital requirements on bank competition and stability: The case of the Kenyan banking industry. Kenya Bankers Association Working Paper Series. https://www.kba.co.ke/wp-content/uploads/2022/05/Working_Paper_WPS_05_122.pdf
Havemann, R. C. (2015). Lessons from South African bank failures (2002–2014). https://core.ac.uk/download/pdf/196259423.pdf
Jahn, N., Memmel, C., & Pfingsten, A. (2013). Banks' concentration versus diversification in the loan portfolio: New evidence from Germany. Deutsche Bundesbank Discussion Paper No. 54/2013. https://hdl.handle.net/10419/88103
Jeitschko, T. D., & Jeung, S. D. (2005). Incentives for risk-taking in banking–A unified approach. Journal of Banking & Finance, 29(3), 759-777. https://doi.org/10.1016/j.jbankfin.2004.05.028
Jin, Y. (2013). An investigation into bank behaviour up to the 2007-08 global financial crisis. http://etheses.bham.ac.uk//id/eprint/4126/
Kane, E. J., & Rice, T. (2001). Bank runs and banking policies: Lessons for African policy makers. Journal of African Economies, 10(suppl_1), 36-71. https://academic.oup.com/jae/article-abstract/10/suppl_1/36/717897
Kasekende, F., & Munene, J. C. (2014). Competence profiling for loans officers in the banking Sector in sub-Saharan Africa: a case of Uganda. Capa Scientific Journal (2), 45-56. https://nru.uncst.go.ug/items/3360d609-7e60-40ae-9a69-3ded60fa29b8
Kaufman, G. G. (1994). Bank contagion: A review of the theory and evidence. Journal of Financial Services Research, 8(2), 123-150.
Kenya Deposit Insurance Corporation. (1993–2016). Annual Reports. https://www.kdic.go.ke/reports/
Kilonzo, A. M., & Atheru, G. (2024). Capital level and financial stability of commercial banks in Kenya. Journal of Finance and Accounting, 4(1), 9–17. https://edinburgjournals.org/journals/index.php/journal-of-finance-and-accountin/article/view/262
Kusi, B. A., Adzobu, L., Abasi, A. K., & Ansah-Adu, K. (2020). Sectoral loan portfolio concentration and bank stability: Evidence from an emerging economy. Journal of Emerging Market Finance, 19(1), 66–99. https://doi.org/10.1177/0972652719878597
Marcus, A. J. (1984). Deregulation and bank financial policy. Journal of Banking & Finance, 8(4), 557-565. https://doi.org/10.1016/S0378-4266(84)80046-1
Milne, A., & Whalley, A. E. (2001). Bank capital regulation and incentives for risk-taking. Cass Business School Research Paper, WBS Finance Group Research Paper, (17). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=299319
Minsky, H. P. (1974). The financial instability hypothesis. The Jerome Levy Economics Institute Working Paper No. 74. https://www.levyinstitute.org/pubs/wp74.pdf
Moyo, D., Nkosi, Z., & Ndlovu, M. (2014). Banking sector instability and governance challenges in Africa: A regional overview. African Financial Journal, 8(2), 22–40.
Muriithi, S., & Waweru, M. (2017). Managing credit risk and staff competencies in the Kenyan banking sector: Challenges and solutions. International Journal of Risk and Financial Management, 5(4), 220–235.
Mwangi, M. (2014). Operational risk and staff competence in Kenya's banking sector: A case study approach. Journal of African Business Management, 6(1), 58–72.
Ndung'u, N. (2012). HR challenges in the Kenyan banking sector [Speech transcript]. Bank for International Settlements. https://www.bis.org/review/r120203a.pdf
Olalekan, M. A., & Adeyinka, O. (2013). Capital adequacy and bank stability: An empirical review of the Nigerian banking sector. International Journal of Financial Studies, 1(3), 35–52.
Reinhart, C. M., & Rogoff, K. S. (2011). From financial crash to debt crisis. American Economic Review, 101(5), 1676-1706.
Sanusi, L. S. (2010). The Nigerian banking industry: What went wrong and the way forward. Convocation lecture delivered at the Annual Convocation Ceremony of Bayero University, Kano. https://www.bis.org/review/r100419c.pdf
Shim, J. (2019). Loan portfolio diversification, market structure and bank stability. Journal of Banking & Finance, 104, 103–115.
Skridulyte, R., & Freitakas, E. (2012). The Measurement of concentration risk in loan portfolios. Economics & Sociology, 5(1), 51-61.
Stiroh, K. J. (2015). Diversification in banking. The Oxford Handbook of Banking, (1), 219-244. https://doi.org/10.1093/oxfordhb/9780199688500.013.0009
Wanjagi, J., Nasieku, T., & Fatoki, O. (2024). Effect of Capital Adequacy on Operational Efficiency of Commercial Banks in Kenya. European Scientific Journal, ESJ, 31, 253. Retrieved from https://eujournal.org/index.php/esj/article/view/18336
Wanjugu, A. (2017). Trends in profitability and stability in Kenya’s banking sector. Kenya Financial Review, 12(3), 121–135.
Barrell, R., Davis, E. P., Karim, D., & Liadze, I. (2010). Bank regulation, property prices and early warning systems for banking crises in OECD countries. Journal of Banking & Finance, 34(9), 2255-2264.
Beck, T., Demirgüç-Kunt, A., & Levine, R. (2003). Law and finance: Why does legal origin matter? Journal of Comparative Economics, 31(4), 653-675. https://doi.org/10.1016/j.jce.2003.08.001
Beck, T., Demirgüç-Kunt, A., & Levine, R. (2006). Bank concentration, competition, and crises: First results. Journal of Banking & Finance, 30(5), 1581-1603. https://doi.org/10.1016/j.jbankfin.2005.05.010
Bertay, A. C., Demirgüç-Kunt, A., & Huizinga, H. (2013). Do we need big banks? Evidence on performance, strategy and market discipline. Journal of Financial Intermediation, 22(4), 532-558.
Brownbridge, M. (1998). The impact of banking sector reforms on the stability of African economies. Development Studies Research, 24(1), 45–67.
Central Bank of Kenya. (1993–2016). Annual Bank Supervision Reports. https://www.centralbank.go.ke
Central Bank of Kenya. (2013). CBK's Risk-Based Supervision Framework – May 2013. https://www.centralbank.go.ke/wp-content/uploads/2016/08/CBKs-Risk-Based-Supervision-Framework-May-2013-1.pdf
Central Bank of Kenya. (2013). Prudential Guidelines for Institutions Licensed under the Banking Act. https://www.centralbank.go.ke/wp-content/uploads/2016/08/PRUDENTIAL-GUIDELINES.pdf
Central Bank of Kenya. (2013). Risk Management Guidelines – January 2013. https://www.centralbank.go.ke/wp-content/uploads/2016/08/risk-management-guidelines-january-20131.pdf
Central Bank of Kenya. (2016). Draft Guidance Note on Internal Capital Adequacy Assessment Process (ICAAP). https://centralbank.go.ke/images/docs/legislation/DraftGuidanceNoteonICAAP.PDF
Central Bank of Kenya. (2020). Banking Circular No. 11 of 2020 – Internal Capital Adequacy Assessment Process (ICAAP). https://www.centralbank.go.ke/uploads/banking_circulars/1925129366_Banking%20Circular%20No.%2011%20of%202020%20-%20Internal%20Capital%20Adequacy%20Assessment%20Process%20%28ICAAP%29%20-%20Aug%2014%20%202020.pdf
Central Bank of Kenya. (2023). Bank Supervision Annual Report 2022. https://www.centralbank.go.ke/2023/05/15/bank-supervision-annual-report-2022/
Central Bureau of Statistics of Kenya. (2002). Economic survey 2002. Government Printer.
Cheserek, B. K. (2007). The determinants of bank failures: A survey of commercial banks in Kenya [Unpublished MBA project]. University of Nairobi. https://erepository.uonbi.ac.ke/handle/11295/7842
DeYoung, R., & Roland, K. P. (2001). Product mix and earnings volatility at commercial banks: Evidence from a degree of total leverage model. Journal of Financial Intermediation, 10(1), 54-84.
Estrella, A., Park, S., & Peristiani, S. (2000). Capital ratios as predictors of bank failure. Economic Policy Review, 6(2), 33–52. https://www.newyorkfed.org/medialibrary/media/research/epr/00v06n2/0007este.pdf
Fofack, H. (2005). Non-performing loans in sub-Saharan Africa: Causal analysis and macroeconomic implications. World Bank Policy Research Working Paper, No. 3761. https://doi.org/10.1596/1813-9450-3761
Gathaiya, R. N. (2017). Analysis of issues affecting bank failures in Kenya. International Journal of Management and Business Studies, 7(3), 1–15. https://www.ripublication.com/ijmbs17/ijmbsv7n3_01.pdf
Goodhart, C. A. (2008). The regulatory response to the financial crisis. Journal of Financial Stability, 4(4), 351-358.
Gorton, G., & Winton, A. (2003). Financial intermediation. In G. M. Constantinides, M. Harris, & R. M. Stulz (Eds.), Handbook of the Economics of Finance (Vol. 1, pp. 431-552). Elsevier. https://doi.org/10.1016/S1574-0102(03)01012-4
Gudmundsson, R., Ngoka-Kisinguh, K., & Odongo, M. T. (2013). The role of capital requirements on bank competition and stability: The case of the Kenyan banking industry. Kenya Bankers Association Working Paper Series. https://www.kba.co.ke/wp-content/uploads/2022/05/Working_Paper_WPS_05_122.pdf
Havemann, R. C. (2015). Lessons from South African bank failures (2002–2014). https://core.ac.uk/download/pdf/196259423.pdf
Jahn, N., Memmel, C., & Pfingsten, A. (2013). Banks' concentration versus diversification in the loan portfolio: New evidence from Germany. Deutsche Bundesbank Discussion Paper No. 54/2013. https://hdl.handle.net/10419/88103
Jeitschko, T. D., & Jeung, S. D. (2005). Incentives for risk-taking in banking–A unified approach. Journal of Banking & Finance, 29(3), 759-777. https://doi.org/10.1016/j.jbankfin.2004.05.028
Jin, Y. (2013). An investigation into bank behaviour up to the 2007-08 global financial crisis. http://etheses.bham.ac.uk//id/eprint/4126/
Kane, E. J., & Rice, T. (2001). Bank runs and banking policies: Lessons for African policy makers. Journal of African Economies, 10(suppl_1), 36-71. https://academic.oup.com/jae/article-abstract/10/suppl_1/36/717897
Kasekende, F., & Munene, J. C. (2014). Competence profiling for loans officers in the banking Sector in sub-Saharan Africa: a case of Uganda. Capa Scientific Journal (2), 45-56. https://nru.uncst.go.ug/items/3360d609-7e60-40ae-9a69-3ded60fa29b8
Kaufman, G. G. (1994). Bank contagion: A review of the theory and evidence. Journal of Financial Services Research, 8(2), 123-150.
Kenya Deposit Insurance Corporation. (1993–2016). Annual Reports. https://www.kdic.go.ke/reports/
Kilonzo, A. M., & Atheru, G. (2024). Capital level and financial stability of commercial banks in Kenya. Journal of Finance and Accounting, 4(1), 9–17. https://edinburgjournals.org/journals/index.php/journal-of-finance-and-accountin/article/view/262
Kusi, B. A., Adzobu, L., Abasi, A. K., & Ansah-Adu, K. (2020). Sectoral loan portfolio concentration and bank stability: Evidence from an emerging economy. Journal of Emerging Market Finance, 19(1), 66–99. https://doi.org/10.1177/0972652719878597
Marcus, A. J. (1984). Deregulation and bank financial policy. Journal of Banking & Finance, 8(4), 557-565. https://doi.org/10.1016/S0378-4266(84)80046-1
Milne, A., & Whalley, A. E. (2001). Bank capital regulation and incentives for risk-taking. Cass Business School Research Paper, WBS Finance Group Research Paper, (17). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=299319
Minsky, H. P. (1974). The financial instability hypothesis. The Jerome Levy Economics Institute Working Paper No. 74. https://www.levyinstitute.org/pubs/wp74.pdf
Moyo, D., Nkosi, Z., & Ndlovu, M. (2014). Banking sector instability and governance challenges in Africa: A regional overview. African Financial Journal, 8(2), 22–40.
Muriithi, S., & Waweru, M. (2017). Managing credit risk and staff competencies in the Kenyan banking sector: Challenges and solutions. International Journal of Risk and Financial Management, 5(4), 220–235.
Mwangi, M. (2014). Operational risk and staff competence in Kenya's banking sector: A case study approach. Journal of African Business Management, 6(1), 58–72.
Ndung'u, N. (2012). HR challenges in the Kenyan banking sector [Speech transcript]. Bank for International Settlements. https://www.bis.org/review/r120203a.pdf
Olalekan, M. A., & Adeyinka, O. (2013). Capital adequacy and bank stability: An empirical review of the Nigerian banking sector. International Journal of Financial Studies, 1(3), 35–52.
Reinhart, C. M., & Rogoff, K. S. (2011). From financial crash to debt crisis. American Economic Review, 101(5), 1676-1706.
Sanusi, L. S. (2010). The Nigerian banking industry: What went wrong and the way forward. Convocation lecture delivered at the Annual Convocation Ceremony of Bayero University, Kano. https://www.bis.org/review/r100419c.pdf
Shim, J. (2019). Loan portfolio diversification, market structure and bank stability. Journal of Banking & Finance, 104, 103–115.
Skridulyte, R., & Freitakas, E. (2012). The Measurement of concentration risk in loan portfolios. Economics & Sociology, 5(1), 51-61.
Stiroh, K. J. (2015). Diversification in banking. The Oxford Handbook of Banking, (1), 219-244. https://doi.org/10.1093/oxfordhb/9780199688500.013.0009
Wanjagi, J., Nasieku, T., & Fatoki, O. (2024). Effect of Capital Adequacy on Operational Efficiency of Commercial Banks in Kenya. European Scientific Journal, ESJ, 31, 253. Retrieved from https://eujournal.org/index.php/esj/article/view/18336
Wanjugu, A. (2017). Trends in profitability and stability in Kenya’s banking sector. Kenya Financial Review, 12(3), 121–135.