Impact of Prudential Regulations on the Profitability of Commercial Banks Listed at the Nairobi Securities Exchange in Kenya

This study examines the impact of prudential regulations on the profitability of commercial banks listed on the Nairobi Stock Exchange (NSE), addressing the persistent challenge of unstable profitability in the sector. Existing literature largely focuses on general banking regulations but lacks insights into their specific effects on bank performance in Kenya. The study explores how capital adequacy, liquidity, and credit risk regulations influence profitability and whether bank size moderates this relationship. Guided by stakeholder, capital buffer, liquidity preference, efficiency structure, and resource-based theories, the study employs an explanatory research design, analyzing panel data from 2013 to 2021 for all 11 publicly traded banks in Kenya. Robust statistical analyses were conducted to ensure result validity. Findings indicate that liquidity and credit risk regulations significantly and negatively impact profitability when measured by Return on Assets (ROA) and Return on Equity (ROE). Stricter liquidity requirements reduce banks' ability to meet short-term financial obligations, thereby lowering profitability. Similarly, stringent credit risk regulations limit banks’ flexibility in lending, increasing the likelihood of non-performing loans and reducing earnings. However, capital adequacy regulations showed little effect on profitability, suggesting that Kenyan banks maintain sufficient capital reserves without directly influencing earnings. Additionally, the study found that bank size does not significantly moderate the relationship between prudential regulations and profitability. The study recommends that the Central Bank of Kenya review liquidity regulations to balance financial stability with profitability. Commercial banks should collaborate with regulators to refine credit risk policies, ensuring efficient loan utilization and improved loan recovery rates. Management should also optimize liquid asset holdings to enhance profitability while maintaining financial obligations. Credit managers should implement stricter approval processes to minimize non-performing loans, ultimately improving bank performance and stability.