LIQUIDITY RISK MANAGEMENT AND FINANCIAL PERFORMANCE OF COMMERCIAL BANKS LISTED IN NAIROBI SECURITIES EXCHANGE
Abstract
Liquidity pressures from falling bond values and deposit losses could lead regional banks to be more conservative in lending to ensure they can meet depositors' demands in a timely manner, resulting in stricter lending markets, additional margin requirements or higher capital requirements, which could hinder commercial and industrial activities. The purpose of the study is to assess the effect of liquidity risk management on financial performance of commercial banks in Kenya. The proxies for liquidity risk management include liquidity coverage ratio, and liquid asset ratio, while return on assets was the proxy for profitability. The study is anchored by liquidity preference theory, shift ability theory and anticipated income theory. The study adopted cross-sectional research design. The target population consisted of all 10 listed commercial banks in Kenya which formed the study’s unit of analysis. The study adopted Census technique as population of interest is relatively small. The study utilized secondary data which was derived from listed commercial banks from 2020 to 2023. Data was analyzed using Ordinary Least Squares (OLS) and The findings from the model showed that there is a statistically significant relationship between liquidity risk management ratios and ROA. The results indicate that liquidity coverage ratio has a strong positive effect on ROA, meaning that an increase in liquidity coverage significantly boosts profitability. The results show that liquid asset ratio has a significant negative effect on ROA implying that an increase in liquid assets reduces profitability. The study concludes that commercial banks with higher liquidity coverage are better positioned to manage short-term obligations and financial shocks, which ultimately enhances profitability. It is concluded that holding excessive liquid assets reduces a bank’s ability to generate income from interest-earning assets, such as loans and investments. It is recommended that commercial banks should prioritize maintaining a strong liquidity coverage ratio to ensure they can meet short-term obligations while simultaneously enhancing profitability. Further, commercial banks should manage their lending strategies prudently, ensuring that loan growth aligns with sustainable deposit levels.
Key Words: Liquidity Coverage Ratio, Liquid Asset Ratio, Financial Performance
CITATION: Gambere, O. J. & Mwikamba, T. (2025) Liquidity risk management and financial performance of commercial banks listed in Nairobi Securities Exchange. The Strategic Journal of Business & Change Management, 12 (1), 362 – 375. http://dx.doi.org/10.61426/sjbcm.v12i1.3191
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DOI: http://dx.doi.org/10.61426/sjbcm.v12i1.3191
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