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.