Camel Financial Indicators and Performance of Tier Three Commercial Banks in Kenya

Tier three banks are vital to the Kenyan economy by promoting competition and ensuring efficiency in the banking sector. Despite their importance, recent statistics indicate poor performance among these banks, possibly due to their financial practices. However, limited research exists on how the CAMEL approach affects their financial performance. This study addressed this gap by analyzing the financial performance of Kenya’s tier three commercial banks through CAMEL factors, namely; capital adequacy, asset quality, management, earning ability, and liquidity. The study was guided by the Free Banking Theory, Agency Theory, Capital Buffer Theory, and Transactional Cost Theory. An explanatory research design was adopted, with a focus on 18 tier three commercial banks. Secondary panel data were collected from the banks' records over a period of ten years (2014-2021). The regression results revealed a coefficient of determination (R-squared) of 0.6918, indicating that 69.18% of the variance in financial performance (ROA) is explained by the CAMEL variables. The analysis identified that Capital Adequacy, Asset Quality, Management Quality, and Liquidity significantly affect the financial performance of tier-three commercial banks, while Earnings Ability did not show a statistically significant effect. The study further examined the moderating effect of Ownership Identity on the CAMEL-ROA relationship, but the findings indicated that it does not enhance the predictive power of the model. Consequently, Ownership Identity was ruled out as a significant moderator. The study concludes that the CAMEL framework is essential for assessing the financial health of tier-three commercial banks in Kenya, emphasizing the importance of strong capital adequacy, liquidity, and management quality for profitability. The study recommends that bank management prioritize these CAMEL components while policymakers should create supportive regulatory frameworks and further research should explore additional performance indicators and potential moderators affecting financial performance. Keywords: CAMEL model, financial performance, tier-three commercial banks, Kenya, ownership identity