LIQUIDITY CAPACITY AND FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA

Abstract

This study determined the effect of liquidity capacity on the financial performance of commercial banks in Kenya. Specific the study determined the effect of Net Stable Funding, Liquidity Coverage, Liquidity Gap and Provisioning for Non-Performing Loans on the financial performance of banks in Kenya. Bank competition variable was used to determine the moderating effect on the relationship between liquidity capacity and the financial performance of commercial banks in Kenya. The study was anchored on the positivism philosophy. The study used an explanatory research design. The study applied panel data models (random effects) based on the outcome of Hausman specification tests to determine the effect of liquidity capacity on the financial performance of commercial banks in Kenya. To test the moderating effect of bank competition variable on the relationship between liquidity capacity and the financial performance of commercial banks in Kenya, Keppel and Zedeck (1989) two-step procedure was used. The regression results revealed that Net Stable Funding and Liquidity Coverage have a significant positive effect on financial performance of commercial banks in Kenya. Provisioning for Non-Performing Loans Liquidity Gap and Provisioning for Non-Performing Loans had a significant negative effect on financial performance of commercial banks in Kenya. The study established that bank competition had a significant moderating effect on the relationship between liquidity capacity and the financial performance of commercial banks in Kenya. Based on these findings, the study recommends that commercial banks in Kenya need to have a good appreciation in terms of having full visibility of all cash flows on the positions of exposures across their operations. Further, they need to have a good insight in terms of the assumptions that drive the cash flows both from a liquidity point of view and from the valuation perspective to best address the terms of requirement from the regulatory standpoint. Additionally, they should empress the stress testing element into the overall equation of their operational activities as prescribed in the Basel III accords. Finally, the study recommends that all commercial banks in Kenya should incorporate liquidity costs, benefits, and risks in the performance measurement, pricing, and approval process for all significant business activities to ensure that the performance of commercial banks in Kenya is enhanced. This research was unable to identify all the possible variables with explanation power on commercial banks’ financial performance in Kenya. Hence, this formed a basis for further research.