LIQUIDITY MANAGEMENT AND FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA
Abstract
Commercial banks in Kenya acknowledge that optimizing liquid assets is required to increase earnings while adhering to the regulator's minimum liquidity ratio and minimum liquid assets for day-to-day operations. This study examines the relationship between liquidity management and the financial performance of commercial banks in Kenya, focusing on the impacts of capital adequacy, non-performing loans, inflation rates, and interest rates. Financial institutions operate within complex environments characterized by risks such as inadequate capital adequacy, loan defaults, poor cash management, and inflationary pressures. These risks, if not effectively managed, can destabilize a bank's financial performance. Using data from the Central Bank of Kenya and applying a random effects model for panel data analysis, this study investigates how these variables influence the profitability of commercial banks, measured by Return on Assets (ROA). Using data from the Central Bank of Kenya and applying a random effects model for panel data analysis, the study finds that an increase in capital adequacy is associated with 0.130 units increase in Return on Assets (ROA), while a rise in non-performing loans negatively impacts ROA by approximately 0.114 units. The effect of inflation on ROA is found to be marginal, with a decrease of 0.499 units, while interest rates positively influence ROA by 0.875 units. These results underscore the critical role of effective liquidity management in optimizing financial performance, particularly in balancing liquid assets to meet regulatory requirements and operational demands. In this context, it is recommended that commercial banks in Kenya enhance their liquidity management strategies by improving capital adequacy and reducing non-performing loans to better withstand economic fluctuations and improve profitability. Strengthening these areas can help banks maintain financial stability and improve overall performance in a challenging economic environment.
Key Words: Capital Adequacy, Non-Performing Loans, Inflation Rate, Interest Rate
CITATION: Matunda, R. M., Miroga, J., & Otinga, H. (2024). Liquidity management and financial performance of commercial banks in Kenya. The Strategic Journal of Business & Change Management, 11 (4), 34 – 50. http://dx.doi.Org/10.61426/Sjbcm.v11i4.3068
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DOI: http://dx.doi.org/10.61426/sjbcm.v11i4.3068
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