Camel Rating Model and Financial Stability of Commercial Banks in Kenya

Abstract

The study sought to examine the effect of CAMEL rating model on financial stability of commercial banks in Kenya. This paper was extracted from the Doctoral dissertation of the first author where the co-authors served as supervisors. Buffer capital theory and efficiency structure theory were utilized. Causal research design was used and a census of forty-one commercial banks was undertaken focusing on the period 2013 to 2019. The panel regression analysis revealed that out of the CAMEL rating variables, only earnings ability had significant effect on financial stability of commercial banks in Kenya. It was recommended that the Central Bank of Kenya motivates earnings (profitability) targets to be in accordance with the size (category) of banks. This is as the earnings ability of commercial banks vary from bank to bank. This will in turn facilitate the improvements and sustenance of financial stability by commercial banks. The study recommends that bank managers when setting earnings target should consider their capabilities as a bank by ensuring realistic targets. Higher earnings translate to higher financial stability according to the study findings, hence apart from the traditional intermediation activities, other profitable business ventures can be explored by commercial banks.