The relationship between asset-liability management and profitability of commercial banks in Kenya

Abstract

A number of studies have been done in various countries to link asset liability management and profitability of commercial banks. The issue of banks’ profitability in developing countries has received little attention. Studies on asset liability management in Kenya have only focused on ALM practices of firms in general without being specific on inducing clear relationship between asset liability management and profitability of commercial banks in Kenya. This study sought to establish the relationship between asset liability management and profitability of commercial banks in Kenya. The study was an empirical study that sought to establish the relationship between asset liability management and profitability of commercial banks in Kenya for the period 2005 to 2010.The population of the study was considered to be the 43 licensed commercial banks in Kenya. Secondary data was collected from the commercial banks’ annual financial statements. Data was analysed using regression analysis and the results presented in tables. The results indicate that there is a relationship between the asset allocation and profitability of commercial banks in Kenya. The study found a positive relationship between most assets and the profitability of commercial banks. The relationship between liabilities and profitability was found to be negative for most classes of liabilities. The study found statistically significant coefficients for most of the categories of assets and liabilities and rejected the null hypothesis that there is no relationship between them. Further, the study found that there is no significant difference between assets- liability management among the different sizes as well as between listed and non listed of commercial banks in Kenya. Comparison between domestic and foreign commercial banks showed that the coefficient for all the assets as well as the liabilities of domestic commercial banks were significantly higher than those of the foreign commercial banks. The study also found that private commercial banks are better than public commercial banks in terms of asset management, but they do not have any superiority over public banks in terms of liability management. The study recommends that banks entrench effective asset liability management policies so as to maximise their profits.