Relationship between corporate liquidity risk and solvency of Commercial Banks in Kenya

Abstract

Risk-taking is an inherent element of banking and, indeed, profits are in part of the reward for successful risk taking in business. However, excessive or poorly managed risk can lead to losses and thus endanger the safety of a bank’s deposits. The management of financial institutions should recognize measure, monitor and control the overall levels of risks undertaken. The purpose of the study was to establish the relationship between corporate liquidity risk and solvency of commercial banks in Kenya. The study was anchored on; shiftibability theory liquidity, anticipated income theory of liquidity, liquidity motive theories and financial economics theory. The study adopted a descriptive research design. The population consisted of 43 licensed commercial banks in Kenya and that had been in operation during the period 2012 to 2016. A census study was carried out therefore no sampling was done. The study was facilitated by use of secondary data that was extracted from published financial reports of the commercial banks, articles and papers relating to relationship between between corporate liquidity risk and solvency of commercial banks in Kenya and fiveyear period commencing 2012 up to 2016. The data collected was cleaned, coded and systematically organized in a manner that facilitates analysis using the Statistical Package for Social Sciences (SPSS). Quantitative analysis was used through descriptive statistics such as measure of central tendency to generate relevant percentages, frequency counts and mean where possible. The coefficient of determination (R2) was used to measure the extent to which the variation in solvency is explained by the corporate liquidity risk. F-statistic and t-statistics were also computed at 95% confidence level to test whether there is any significant relationship between variables of corporate liquidity risk and solvency of commercial banks in Kenya. The study found that leverage with a coefficient of 0.823, liquidity risk with a coefficient of 0.723; firm size with a coefficient of 0.812, capital adequacy with a coefficient of 0.576 and operation efficiency with a coefficient of 0.673 were positively and significantly related to the Solvency of Commercial Banks. The study concluded that leverage had the greatest effect on the Solvency of Commercial Banks followed by firm size then liquidity risk then operational efficiency while capital adequacy had the least effect to the Solvency of Commercial Banks. The study recommends that bank managers should take note of the fact that the size of the banks influences their solvency, that the management of commercial banks should to formulate strategies to be adopted in order to militate against liquidity risks for a better financial performance and a need for Commercial banks in Kenya to increase their short term assets it was revealed that increase in banks liquidity positively influence the solvency of the banks.