Liquidity, Capital Adequacy and Operating Efficiency of Commercial Banks in Kenya

Abstract

This study aimed at examining the effect of liquidity and capital adequacy on the operating efficiency of commercial banks in Kenya.  Specifically, we sought to establish the effect of bank specific liquidity ratios (Interbank ratio, loan ratio, net loans to total deposits, liquid assets to short term liabilities ratio) and capital adequacy ratios (core capital ratio, risk  based capital ratio, total capital ratio, equity capital to total asset ratio) on their operating efficiency. The findings of the study indicate that the previous year operational efficiency ratio, liquid assets to short-term liabilities ratio and total capital ratio positively and significantly affect the bank operating efficiency. The study adopted an explanatory research design and analysed the data using Fixed Effects Regression. From the regression results, the overall R² of 0.4108 was derived meaning that 41.08% of banks operational efficiency is as a result of the study variables.  This implies that the history of a firm’s performance will definitely influence how a firm moves forward in an effort to streamline its operational strategies. Therefore, banks should seek on mechanisms to improve their liquid assets to deposits ratio and total capital ratio in readiness to improve operating efficiency and remain competitive in the market.

Keywords: Commercial Banks, Operating Efficiency, Liquidity, Capital Adequacy