RISK-BASED CAPITAL AND FINANCIAL STABILITY: EMPIRICAL EVIDENCE FROM KENYAN LISTED BANKS

Авторы

  • Omondi Godfrey Odundo Department of Accounting and Finance, School of Business and Economics, Maseno University, Kenya
  • Peter Kamau Ndichu Department of Accounting and Finance, School of Business and Economics, Maseno University, Kenya
  • Simon Oluoch Ondiwa Department of Accounting and Finance, School of Business and Economics, Maseno University, Kenya

DOI:

https://doi.org/10.46827/ejefr.v10i5.2282

Ключевые слова:

risk-based capital, risk-weighted assets, bank capital, financial stability, lag structure, panel EGLS, Kenyan listed banks

Аннотация

Since the Global Financial Crisis, the stability of commercial banks has remained a central policy concern, intensifying in Kenya where mergers, acquisitions and restructuring have concentrated more than 75% of banking-sector market share among nine listed banks. The Central Bank of Kenya has simultaneously tightened Basel III-aligned risk-based capital requirements, yet whether such capital regulation, alongside the underlying risk composition of banks' balance sheets, translates into greater financial stability remains empirically unresolved for Kenya's listed banking segment. This study examines the effects of risk-based capital (RBC) on financial stability among Kenyan listed banks, controlling for the risk-weighted assets-to-total assets ratio, operational cost efficiency, and macroeconomic growth and anchored in the Buffer Theory of Capital. The study uses a balanced quarterly panel of eight Nairobi Securities Exchange-listed banks over 2013Q1–2025Q2. After introducing one-quarter lags, the estimation sample comprises 392 bank-quarter observations.  A Hausman test supports bank fixed effects, and cross-sectional and period heteroskedasticity are addressed through Panel EGLS with cross-section weights and panel-corrected standard errors (PCSE). The lagged dependent variable, financial stability, is positive and highly significant (ρ = 0.5248, p < 0.001), confirming strong persistence and path dependence in bank stability over time. Risk-based capital exerts a positive and significant effect on financial stability (β = 1.2912, p = 0.0004), and the risk-weighted-assets-to-total-assets ratio is also positively and significantly associated with stability (β = 0.2656, p = 0.0045). The cost-to-income ratio is negatively and significantly associated with stability (β = −0.2210, p = 0.0002), while GDP growth is negatively signed but statistically insignificant (β = −0.0172, p = 0.1344). The model explains 86.6% of the variation in financial stability (F = 204.37, p < 0.001), and the results are broadly robust to an alternative two-quarter lag structure. The findings confirm that adequate risk-based capitalisation is central to bank resilience in Kenya and that the composition of risk-weighted assets carries independent information for financial stability beyond capital adequacy alone. The study recommends that capital regulation remain the cornerstone of prudential policy in Kenya, that supervisors monitor the evolving risk-weighted composition of bank balance sheets, and that operational efficiency be strengthened alongside capital adequacy requirements.

 

JEL: G21; G28; G32; G34; L11

Биографии авторов

  • Omondi Godfrey Odundo, Department of Accounting and Finance, School of Business and Economics, Maseno University, Kenya

    Godfrey Omondi Odundo is a PhD candidate in Finance at Maseno University and a Part-Time Lecturer in the Department of Accounting and Finance, School of Business and Economics, at the same institution. He holds an MSc in Finance and a BCom (Accounting) degree, and is a Certified Public Accountant of Kenya (CPA-K). He has over 12 years of experience in University and Professional Education, accounting practice, research, and corporate training. Since 2022, he has served as an examiner and assessment tool developer for TVET CDACC, and works as a Training Consultant with Trainingcred Institute delivering programmes in finance, investment analysis, and governance, risk, audit and compliance. His research interests include banking and financial stability, corporate governance and board diversity, and SME sustainable financing.

    Email: omondi.odundo@yahoo.com

    ORCID: https://orcid.org/0000-0003-4512-7200

  • Peter Kamau Ndichu, Department of Accounting and Finance, School of Business and Economics, Maseno University, Kenya

    Dr. Peter Kamau Ndichu is a Lecturer in Finance in the Department of Accounting and Finance, School of Business and Economics, at Maseno University, Kenya. His research interests include behavioural finance, wealth management, capital markets and investments, financial modeling, financial economics, behavioural economics, and econometrics.

    Email: pcamau@gmail.com

    ORCID: https://orcid.org/0009-0001-3527-6352

  • Simon Oluoch Ondiwa, Department of Accounting and Finance, School of Business and Economics, Maseno University, Kenya

    Dr. Simon Oluoch Ondiwa is an MSME consultant currently working with DT Global International Development EA Limited. He previously served as an Adjunct Lecturer in the School of Business and Economics at Maseno University, Kenya. He has also collaborated on research with the University of Maryland, USA, and Maseno University, assessing the cassava value chain and food security in Kenya and the Democratic Republic of Congo. He holds a PhD in Business Administration (Finance), an MBA (Finance), and a Bachelor of Business Administration (Finance). His research interests focus on the operations of financial institutions and markets.

    Email: sondiwa81@gmail.com

    ORCID: https://orcid.org/0000-0002-0521-5321

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Опубликован

2026-08-03

Выпуск

Том 10 № 5 (2026)

Раздел

Articles