Assessing the Impact of Liquidity Ratio Requirements on the Financial Performance of Commercial Banks in Kenya

Abstract

In practice, some commercial banks in Kenya are presently facing liquidity challenges for instance the National Bank, Consolidated Bank, and Development Bank of Kenya. For instance, as of December 2017, the Development Bank of Kenya posted a negative liquidity position at 21.6% against the required legal threshold of 20%. For the National Bank of Kenya, the close of 2017 saw the total deposit liability standing at negative 5.5%, while core capital to total assets averaged negative 7.9%. As of 2018, NBK registered a drop in profit by 84% to stand at Kshs. 21.97 billion. The findings were that liquidity ratio requirements (β=0.345, p<0.05); cash reserve ratio requirement β=-0.008, p<0.05); loan deposit ratio requirement (β=-0.020, p<0.05) & capital adequacy ratio requirement (β=0.032, p<0.05) are significant predictors of financial performance of commercial banks in Kenya. The study concludes that liquidity requirements are a significant predictor of the financial performance of commercial banks in Kenya. The study recommends that finance managers of commercial banks in Kenya should strive to balance current assets and current liabilities to ensure they meet their obligations as they arise. The marketing managers of commercial banks in Kenya should invest more efforts in acquiring more customers for increased mobilisation of deposits. The loan officers and credit managers working in the commercial banks in Kenya should speed up the process of credit appraisal of customer loan application process to increase the uptake of loans which are key sources of interest income to these institutions. The shareholders of the commercial banks in Kenya should ensure that their institutions are adequately capitalised so that they are able to withstand inherent shocks occasioned by liquidity constraints likely to negatively impact financial performance. The findings are expected to shed more light on the critical role played by liquidity requirements as far as financial stability and resilience of the banking sector in Kenya are concerned