Influence of Bank Capitalization on Intermediation Efficiency of Commercial Banks in Kenya

The banking sector in Kenya exhibits a relatively low level of intermediation efficiency at 67.5%, which constrains its ability to effectively fulfill its critical role in promoting economic growth. The purpose of this study was to investigate the influence of bank capitalization on intermediation efficiency of commercial banks in Kenya. The research was grounded in the economic efficiency theory. The study adopted an explanatory sequential research design which involved use of both secondary and primary data in two phases. In the first phase, quantitative secondary data was collected from the annual financial statements of individual banks and analyzed to establish baseline relationships. This was followed by collection and analysis of qualitative primary data to help explain or elaborate on the quantitative results achieved in the first phase. Primary data was collected through an interview guide. The target population was 39 commercial banks in operation in Kenya during the study period from 2014 to 2023. A two-stage analysis was adopted. In the first stage, efficiency scores were generated using the Data Envelopment Analysis (DEA) methodology and the estimated efficiency scores were used as dependent variables in the efficiency equation. Then, Tobit regression analysis model was used to regress the computed DEA efficiency scores against bank capitalization. The study also gathered qualitative data using interviews which was analyzed using thematic summary analysis. The study found that bank capitalization has a statistically significant and positive impact on the intermediation efficiency of commercial banks in Kenya (β = 0.2215, z = 2.71, p = 0.007). The study recommends to policymakers to consider promoting the growth and consolidation of commercial banks to enhance intermediation efficiency. Further, regulators should intensify risk-based supervision to ensure that undercapitalized banks are promptly addressed to prevent systemic risks.