The effect of Asset quality on the Value of Commercial Banks in Kenya

Abstract

Well-functioning banks diminish not only the transaction costs, but also the moral hazard and asymmetric information issues observed in the financial market. Despite the role played in financial inclusion, commercial banks in Kenya have seen increased liquidity risk, declining profitability and credit risk that has weakened the sector's stability. This research sought to determine the effect of asset quality on commercial banks value in Kenya. The study was anchored on four main theories including Capital Structure Irrelevance Theory, Interest Rate Theory, Signaling theory and liquidity preference theory. This study adopted an explanatory research design and followed a positivism research philosophy. The study involved all the 43 commercial banks in Kenya which were selected using census sampling. The study covered a 7-year period between 2014 and 2021. Secondary data was used for the study and was obtained from the audited annual financial reports of the commercial banks in Kenya and CBK. The collected data was analyzed by uses of descriptive and inferential analysis with the help of Statistical Package for Social Sciences (SPSS) version 26 and STATA. Tables and figures were used to present the analyzed data. The study established that Asset Quality has a positive impact on the commercial banks value in Kenya. The study concludes that banks should improve their asset quality by adopting effective risk management strategies and banks to improve their management efficiency by investing in employee training and development programs, adopting technology to automate processes, and streamlining operations. Commercial banks can improve their liquidity by implementing effective liquidity risk management strategies. The study recommends the banks to improve their asset quality by adopting effective risk management strategies.