Effect of Liquidity Management on Performance of Commercial Banks in Kenya

Abstract

The purpose of the study was to analyze the effect of Liquidity management on performance of commercial banks in Kenya. The study was based on Portfolio theory of Cash Management, Cash Management theory, Transaction Cost theory, Free Cash Flow theory and pecking order theory. The study used mixed research design which involves collecting and analyzing both qualitative and quantitative data. The target population of the study comprised the 6913 employees in management and supervisory cadres in commercial banks in Kenya. Stratified sampling technique was used to identify the sample size in every stratum. Data collection instruments were both structured and unstructured questionnaires. Data collection methods were both primary and secondary. The data was analyzed using Statistical Program for Social Sciences (SPSS) windows version 21.Multiple linear regression analysis was carried out to analyze the determinants of cash flow management on performance of commercial banks in Nairobi City County, Kenya. Pilot test was carried out for validity and reliability of research instruments. Regression analysis was carried out to test the significant levels of one variable to the other in the study. ANOVA was carried out to test the hypotheses of the study. The study is significant to the banking sector and the government of Kenya in formulation of different financial decisions and in policy making. The results of the study indicate that all the independent variable have a significant positive effect on performance of Commercial banks Kenya.  The findings revealed that commercial banks in Kenya carry out liquidity management practice and that inflation rates influence interest rates in commercial banks in Kenya. Liquidity management practice was found to be positively related to performance of commercial banks in Kenya.   The study recommends that the management of commercial banks in Kenya should be enhanced through frequent audits to be able to curb interest rates especially the unanticipated inflation which adversely affects the functions of money by undermining wealth holders’ confidence in its ability to be used as medium of exchange and store of value. They should also maintain the minimum liquidity requirement as stated by the Central Bank of Kenya as both illiquidity and excess liquidity are financial diseases that can easily erode the profit base of a bank as they affect bank's attempt to attain high profitability-level. They should also put into consideration liquidity levels in pursuit of high profit for it can cause great illiquidity, which reduces the customers' patronage and loyalty.

Keywords: Liquidity, Financial Performance

DOI: 10.7176/EJBM/11-17-04

Publication date:June 30^th 2019