The relationship between liquidity and profitability of Commercial Banks in Kenya

Abstract

Liquidity and profitability are key variables, which provide information concerning the performance and survival of many businesses. In order to obtain a long-term survival and healthy growth of any business venture, both profitability and liquidity should go hand in hand. The aim of this study was to determine the relationship between profitability and liquidity of commercial banks in Kenya. To accomplish the stated objective, a descriptive research design was adopted. Secondary data was obtained from published accounting reports of the 42 commercial banks for a period of 5 years from 2012 to 2016. Analysis of data was done through descriptive statistics, the Karl Pearson correlation, the granger causality test and the multiple linear regressions using STATA. The granger causality results established that there was no bidirectional relationship between liquidity and profitability of commercial banks in Kenya. The regression results revealed that the relationship between liquidity, capital adequacy and commercial banks profitability in Kenya was negative and insignificant. The findings further established that relation between assets quality and commercial banks in Kenya return on assets was significant and negative while the relation between bank size and return on assets was positive and significant. The findings also revealed that the relation between management quality and return on asset of Kenyan banks is positive and significant. The study concluded that there is no bidirectional relationship between profitability and liquidity in commercial banks in Kenya and liquidity had no significant effect on the profitability of Kenyan commercial banks. The study however recommended that commercial banks should maintain optimal liquidity levels in order to meet current obligations when they fall due.