LIQUIDITY MANAGEMENT POLICY AND FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA

Abstract

The primary goal of the study was to ascertain how Kenyan commercial banks' financial performance was impacted by their liquidity management policies. Agency Theory, Liquidity Preference Model, Miller-Orr Model, and Shift Ability Theory all provided support for the research. A causal research design was adopted. The study's target population comprised 43 commercial banks, and therefore a census technique of sampling was adopted. Panel data for five years, between 2015 and 2019 were collected using the data review guide. All ethical considerations from the respective institutions and authorities regarding this study were adhered to. A multiple-panel regression model was adopted to analyze the study data. Results of the study showed that liquidity management policy had a big impact on how well Kenyan commercial banks were doing financially. Cash management policy, Credit management policy, Investment management policy, and Liquid assets Holdings all had a positive and significant influence on the banks’ ROE. All the study null hypotheses were therefore rejected. Consequently, the study concluded that the financial performance of commercial banks was significantly impacted favorably by the holdings of liquid assets, cash management practices, credit management practices, and investment management practices. This study, therefore, recommended a careful estimation of the most suitable amount of liquid assets holdings to be maintained by the bank at any given time to bring the required profit levels. In addition, banks were recommended to maintain moderate amounts of liquid cash of up to twenty percent to allow them to execute their day-to-day events. More attention should also be paid to the type of assets banks invest their funds in, as an increase in investment in suitable assets increases the banks’ financial performance. Furthermore, the banks’ management should carefully balance the proportion of their deposits that they invest in other securities. Furthermore, based on the study findings, the Credit management policy was found to cause the most substantial impact on the banks' ROE. Consequently, this study recommended more attention and caution on this policy by both the regulatory authority and the financial institutions themselves to achieve the required levels of profit margins at the same time.

Key Words: Liquidity Ratio,Cash Management Policy, Credit Management Policy, Liquid Assets Holdings

CITATION: Gitari, M. S., & Musau, S. (2023). Liquidity management policy and financial performance of commercial banks in Kenya. The Strategic Journal of Business & Change Management, 10 (2), 56 –70.