Liquidity Management Policy and Financial Performance of Commercial Banks in Kenya
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Date
2023-09
Authors
Gitari, Symon Maina
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
Over lh.c |1.15l decade since two thousand and ten, the banking industry in Kenya has experienced some sn'gmficnnl developments, in terms of performance, regulations as well as the number of banks in_operation. Although some banks have benefited from the transformation, many commercial banks have found it difficult to remain competitive and maintain their day-to-day
operations. Due to this, three banks—Dubai Bank, Imperial Bank, and Chase Bank—were
deemed insolvent in August two thousand and fifteen, and October, two thousand and fifteen and two thousand and sixteen respectively due to liquidity problems. In two thousand and nineteen,
the Due to financial problems impeding its day-to-day operations, Kenya Commercial Bank Ltd
also acquired the National Bank of Kenya. The primary goal of the study was to ascertain how
Kenyan commercial banks' financial performance was impacted by their liquidity management
policies. The following particular goals served as the study's guiding principles: To ascertain the
impact of Liquid Assets Holdings on the financial performance of commercial banks in Kenya;
to evaluate the impact of cash management policy; to establish the impact of credit management
policy; and finally to evaluate the impact of investment management policy on the financial
performance of commercial banks in Kenya. 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, in the letter. 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, recommends 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 are 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 recommends 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.
Description
A Research Project Submitted to the School of Business Economics and Tourism in Partial Fulfillment of the Requirements for the Award of the Degree of Master of Business Administration (Finance Option), Kenyatta University, September, 2023
Keywords
Liquidity Management Policy, Financial Performance, Commercial Banks, Kenya