Effect of Macroeconomic Factors on Commercial Banks Liquidity in Kenya

Abstract

The study aimed at establishing the effect of macroeconomic factors on commercial banks liquidity in Kenya for the period 2005-2017 and controlling for a few bank specific factors. To do so, the study used a sample of 30 commercial banks that had traded consistently for the entire study period. The study use a panel regression model to determine the effects of macroeconomic variables on liquidity. Through a random effect model, the study found that cost of funds, loan loss provisions interest rates, inflation rates, and profitability positively influenced liquidity while gross domestic product negatively influenced the liquidity of commercial banks in Kenya. The study concluded that bank managers and policymakers have to always consider both macroeconomic and bank specific factors in making liquidity related decisions.