Effects of Prudential Regulations on Financial Performance of Commercial Banks in Rwanda: A Case of Bank of Kigali

The special role that banks play in the economic system implies that banks should be regulated and supervised not only to protect investors and consumers but also to ensure systems stability. Compliance to capital and liquidity requirements, Non-performing Loans level set as well as risk management are the major challenges faced by banks in order to perform effectively and become profit-making originations. This study sought to examine the effect of prudential regulations on Financial Performance of Commercial Banks in Rwanda. To achieve this, the study examined the effect of capital requirements on the financial performance of Commercial Banks in Rwanda, established the effect of liquidity requirements on the financial performance of Banks in Rwanda, determined the effect of assets quality on the financial performance of Banks in Rwanda, examined the effect of risk management on the financial performance of Banks in Rwanda. The study adopted a descriptive research design. The target population of this study comprised of 95 managers of Bank of Kigali. A sample size of 77 respondents was determined from a total population of 95 individuals using the formula by Yamane. A descriptive research design was adopted due to its ability to describe the relationship between elements of prudential regulations and Financial Performance. Stratified random sampling technique was used to select the managers. Primary data was collected using a structured questionnaire. The data was analyzed using SPSS for Descriptive statistics to test the impact of prudential regulations and Correlation analysis was used to determine the nature and magnitude of the relationship among prudential regulations variables, and regression analysis. The regression results revealed that there is a positive relationship between prudential regulations and financial performance of commercial banks in Rwanda. The coefficient of determination proved that the independent variables contributed to 75.8 % of the variation in financial performance as explained by adjusted R2 of 0.758 %, which shows that the model was a good predictor. The study findings also revealed that the banking sector enjoys a strong financial performance partly because of implementing and maintaining effective prudential regulations as imposed by the BNR. The study recommends that banks should effectively implement prudential regulations due to the nature of the riskiness of the banking sector and its impact on financial performance.