Effect of Central Bank Regulations on Financial Performance of Commercial Banks in Rwanda

This study aimed to assess the effect of regulations of central bank of on performance of commercial banks in Rwanda. The specific objectives are to examine the effect of capital adequacy regulation on the financial performance of commercial banks in Rwanda, to determine the effect of liquidity Management regulation on the financial performance of commercial banks in Rwanda and to find out the effect of credit risk management regulation on the financial performance of commercial banks in Rwanda. Descriptive research design was used to establish the relationship between study variable that is, if change in regulation requirement results to a change in financial performance of a bank. The target population was 11 licensed commercial banks in Rwanda. A census sampling method of eleven commercial banks in Rwanda. This study used secondary data from Central Bank of Rwanda for eleven licensed commercial banks. Variance inflation factor were used in STATA software to detect multicollinearity problem in the model from the study variables. The P values obtained are as follows: Core capital to total risk weighted assets ratio yielded a value of 0.9744, core capital to total deposit liabilities ratio yielded a value of 0.9987 while total capital to total risk weighted assets ratio yielded a value of 0.9884. The P value for return on assets ratio was 0.9998 while for return on equity ratio it was 0.9795. Return on capital ratio had a P value of 0.595 while credit risk ratio had 0.987. Liquidity risk ratio yielded a P value of 0.9999 and interest coverage ratio a value of 0.00. The above P values for all the ratios except the interest coverage ratio leads us to accept the null hypothesis that there is no relationship between regulations and the financial performance of commercial banks in Rwanda The interest coverage ratio yielded a P value of zero which is assumed to be a rounding off by Microsoft Excel. This being a zero value has not yielded a result that can be used to either accept or reject the null hypothesis. In the analysis of capital adequacy, 100 % of the banks in 2011, 2012 and 2015 fully complied with the minimum capital requirement. In 2010, 2013 and 2014, 97.62 % complied. The amount of capital in the banks has been increasing steadily over the last six years. At a glance there seems to be no relationship between bank regulations and the growth of capital otherwise we would have seen a major increase from 2012 to 2013 when the minimum requirement was increased from 250 million to 1 billion shillings. The high levels of capital in the commercial banks are indicative of a stable banking sector. The researcher concluded that regulations of central bank of Rwanda highly affect financial performance of commercial banks operating in Rwanda, Capital adequacy has a positive and significant effect on profitability and growth in customer base of commercial banks in Rwanda, Liquidity management practices prove a positive on profitability and growth in customer base of commercial banks in Rwanda, Credit risk Management also have a significant effect on profitability and growth in customer base of commercial banks in Rwanda. The study findings confirmed that 100 % of the banks in 2011, 2012 and 2015 fully complied with the minimum capital requirement which affect their daily operations positively. The researcher recommended that banks comply fully with the stipulated regulations and the Central Bank must ensure that all banks comply. The commercial banks should be equipped with adequate capital so that they may meet their mandates, the commercial banks should adopt appropriate risk management measures that help them to manage the credit appropriately so that the number of non-performing loans may be reduced and the central bank of Rwanda should effectively monitor the commercial banks how they manage their liquidity so that a stable banking environment is established.