Level of Compliance with Capital Adequacy Guidelines and Technical Efficiency of Commercial Banks in Kenya: The Moderating Role of Bank Size

This research evaluated the extent to which commercial banks’ compliance with capital adequacy guideline levels positively or negatively impacts technical efficiency in Kenya. The research employed a quantitative approach using ten years’ data for all licensed commercial banks in Kenya. Data Envelopment Analysis (DEA) was used to determine the measures for efficiency, and the two-limit Tobit model and Maximum Likelihood Estimation (MLE) were used to determine the efficiency measure effects. The results showed that there was a positive and statistically significant relationship between commercial banks’ capital adequacy and technical efficiency. It showed that commercial banks with higher and better levels of capital had improved levels of efficiency. The study recommends that commercial banks maintain high levels of prudential compliance, as greater adherence to capital adequacy guidelines is positively associated with higher technical efficiency. The paper also recommends that regulators and policymakers consider bank size when designing and implementing prudential guidelines. It was further recommended that researchers examine this relationship across other financial institutions, including microfinance and cooperative banks, and over longer time periods to capture evolving regulatory and operational dynamics Keywords: Capital Adequacy, Technical efficiency, Bank size, Commercial banks