Political Risk, Credit Risk Management and Liquidity of Commercial Banks in Kenya
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Date
2025-10
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Kenyatta University
Abstract
Liquidity has remained a challenge among commercial banks in Kenya. For instance, the ratio of loans against deposits of the said banks stood at 0.740969, 0.74092, 1, 0.713654 and 0.795822 with an average value being 0.798273 across the period 2018, 2019, 2020, 2021 and 2022 respectively. This implies that most of the commercial banks did not have adequate assets as compared to deposits needed to finance customer loan requests which provide evidence of liquidity concerns among commercial banks in Kenya. Commercial banks can play an important role in the economy of developing countries like Kenya through their financial intermediation role, supporting borrowing and investment and hence economic growth. However, the aforementioned concerns imply that Kenya is yet to enjoy the significant role of a banking sector. Thus, this study sought to establish the effect of credit risk management on liquidity of commercial banks in Kenya. More specifically, the link between credit information sharing, loan loss provisioning and lending requirements and liquidity of commercial banks in Kenya with political risk as a moderator variable was considered in this study. The study was guided by the information asymmetry, transaction cost, the modern portfolio theory and liquidity preference theory. Positivist research philosophy was adopted in this study besides explanatory design. The study targeted 39 Kenyan banks and census was used. Information was collected from primary sources on information sharing and lending requirements while secondary data on a period 2018-2022 was gathered on loan loss provisioning and liquidity. The questionnaire was pilot tested before data gathering process among 4 credit managers from commercial banks in Kenya. The reason for pilot testing was to determine reliability of questionnaire while its validity was ensured by supervisor and two experts in the field of finance. Processing of the gathered data was done descriptively and inferentially and presented in tabular and graphical forms. Multicolinearity, normality was conducted as diagnostic tests before regression analysis to test its assumptions. The ethical issues that were considered in this study included appropriate citation and referencing of the information reviewed to avoid plagiarism and voluntary participation by respondents. The findings were that credit information sharing (p<0.05), loan loss provisioning (p<0.05) and lending requirements (p<0.05) had significant effect on liquidityof commercial banks as moderated by political risk (p<0.05). The study concluded that credit risk management and liquidity of commercial banks in Kenya are significantly related with each other with political risk as a moderator variable. It was recommended that Credit Managers working among commercial banks in Kenya should invest in latest technologies for carrying out timely credit information of customers with the licensed Reference Bureaus. The loan officers working with commercial banks in Kenya should diversify into loan portfolio in order to remain stable and have meaningful contribution to the growth of an economy. Managers working with commercial banks in Kenya should effectively invest in lending requirements like land tittle deeds and logbooks in order to improve on their credit risk management which in turn can allow them achieve optimal and required liquidity levels. The government of Kenya should seek to improve on the existing political environment in the country so as to positively influence liquidity level and thus promoting financial stability of the commercial banks
Description
A Research Thesis Submitted to the School of Business, Economics and Tourism in Partial Fulfilment for the Award of a Degree of Master of Science (Finance) at Kenyatta University, October, 2025
Supervisors:
1.Daniel Makori
2.Bancy Muchira