The Relationship Between Liquidity Risk and Failure of Commercial Banks in Kenya
Abstract
The objective of this study was to establish the relationship between liquidity risk and
failure of commercial banks in Kenya in the years 2013 to 2016. Additionally, the study
endeavoured to establish the effect of capital adequacy, asset quality, management
quality, earnings, sensitivity to market and size on the failure of banks in Kenya. To
achieve this goal, secondary data was collected from the websites of operational banks
while data for failed banks was collected from reports published by the central bank of
Kenya, corroborated with publications in past years newspapers. The study covered a
panel of 42 commercial banks whose financial statements were analysed from the year
2013 to 2016. A total of 157 bank years were analysed of which there were 7 failure
observations and 150 survival observations. Panel logit regression was used to analyse
the data using Eviews 9.5 student version. The results of the regression revealed that
there was a positive and significant relationship between liquidity risk and bank failure,
implying that liquidity increased the likelihood of failure. The study also found a
positive and significant relationship between bank failure and asset quality and earnings
indicating that they increased the likelihood of failure. The study found a negative and
significant relationship between bank failure and management quality and sensitivity
to market implying that they decreased the likelihood of bank failure. Capital adequacy
and bank size were found to have insignificant relationship with the failure of
commercial banks in Kenya. These findings are valuable to managers in understanding
how the variables of the study increase or decrease the likelihood of failure so that they
may come up with appropriate strategies for managing the various risks facing their
banks. The findings are valuable to bank regulators in evaluating the relevance and
potency of the indicators used in monitoring and evaluating the soundness of banks in
Kenya. The findings are valuable to scholars who are interested on confirming and
developing theories that explain bank failure. The study contributes to existing
knowledge by highlighting the factors that significantly contributed to the failure of
commercial banks in Kenya. The study contributes to the academic knowledge by
providing empirical evidence on how the CAMELS offsite bank monitoring system can
explain bank failure using Kenyan commercial banks data. The study recommends that
bank managers adopt a management philosophy that discourages overemphasizing on
short term profitability at the expense of future of the bank. The study suggest that a
detailed case study of factors that contributed to the failure of each bank be carried out
and that a prospective study predicting future bank failures be done as well.
Publisher
University of Nairobi