Effects Of Short Term Interest Rates On Liquidity Of Commercial Banks In Kenya

Abstract

The role of Banks remain central in financing economic activity and its effectiveness could exert positive impact on overall economy as a sound and profitable Banking sector is better able to withstand negative shocks and contribute to the stability of the financial system. Banks play intermediary role in the economy through channeling financial resources from surplus economic units to deficit economic units. In turn, they facilitate the saving and capital formation in the economy. Liquidity is the ability of bank to fund increases in assets and meet obligations as they come due, without incurring unacceptable losses. Hence, liquidity risk arises from the fundamental role of banks in the maturity transformation of short -term deposits into longterm loans. Objective of the Study was to examine the effects of short term interest rates on liquidity of commercial banks in Kenya. The theories used in this study included: Liquidity Preference Theory, The Real Theory (Model) of Interest Rate and Fisher’s Theory of Interest. The current study employed the use of both descriptive survey and historical research designs. The target population for this study was all the 44 listed commercial banks in Kenya as at December 2015. The study employed the use of document analysis of secondary data. The study extracted reports on various variables for the last five financial years (2011 to 2015). Secondary data on the short term interest rates data was collected from financial institutions through their quarterly reports and CBK and this was the individual weighted lending rates in proportion to the market share of the firms. The data on Debt to Equity ratio was collected from the firm’s quarterly financial reports and emphasis put on total liabilities and total assets. The operating expense ratio was similarly collected from the firms quarterly financial reports of the firms specifically the operating expenses and the revenue. Secondary data on bank liquidity was collected from banks basically through quarterly reports on cash and cash equivalents balances and the value of the total assets. The data collected was sorted, organized and captured in SPSS analysis tool. The study used one way ANOVA to test the level of significant of the independent variables on the dependent variable at 95% level of significance, the one way ANOVA was used to test whether there exist any significant difference between the study variable. In addition, the study conducted a multiple regression analysis. Inferential statistics was analyzed using regression analysis to establish the relationship among study variables and to test the hypothesized relationships. Inferential statistics was carried out using multiple regression models. The regression model was used to test the strength of the predictor variables. The study found a weak positive correlation between banks liquidity of commercial banks and short term interest rates. The study also found weak positive correlation between banks liquidity of commercial banks and debt to equity ratio. A negative correlation between banks liquidity of commercial banks and Operating Expense / Revenue was established. The study therefore concludes that short term interest rates, debt to equity ratio and Operating Expense / Revenue are not major determinants of bank liquidity in Kenya. Based on the findings on average, commercial banks in Kenya will register liquidity of negative - 0.422 units if the independent variables were excluded in the estimation model. This implies there are other control variables that affect liquidity of banks which were not considered in the study.