Capital Regulation and Bank Growth: Bank-Level Evidence from Kenya

Abstract

This paper examines the relationship between regulatory capital adequacy and bank growth using a bank-level panel of licensed commercial banks in Kenya over the period 2015–2024. The study evaluates whether higher capital ratios systematically constrain balance-sheet growth in an emerging-market banking system characterized by structural heterogeneity across institutions, given the ongoing debates on the trade-off between financial stability and credit expansion under Basel-style prudential frameworks,.
By applying fixed-effects and dynamic System Generalized Method of Moments (System-GMM) estimators to account for unobserved heterogeneity, persistence, and potential endogeneity, the analysis finds no robust evidence that capital adequacy ratios exert a uniform direct effect on asset or deposit growth across banks. Instead, growth dynamics appear primarily driven by structural characteristics such as bank size, profitability, efficiency, and funding composition. The study finds larger banks exhibiting slower expansion, while profitability and funding structure play more consistent roles in shaping growth outcomes.
Heterogeneity analysis indicates that the relationship between capital and growth varies across bank tiers. While higher capital ratios are associated with weaker deposit growth among larger banks, smaller institutions display different adjustment patterns. This may imply that regulatory capital influences balance-sheet and funding strategies in a non-uniform manner. Robustness checks using alternative capital measures confirm that aggregate capital-growth relationships remain modest within the sample period.