Credit Ratings and Asset Liquidity Among Commercial Banks in Kenya

Abstract

Capital structure decisions is an important role for the managers of listed firms, with the liquidity of firm considered as one of the key decisions for firm managers. Credit ratings of a firm has implications on the liquidity of firm, yet the impact and nature of this relationship in the Kenyan financial sector is unknown. The goal of “this study was to establish the relationship between credit ratings and asset liquidity of listed commercial banks in Kenya”. This was analyzed through the following sub objectives: “to determine the relationship between investment credit ratings and liquidity of listed commercial banks in Kenya, to assess the relationship between speculative credit ratings and liquidity of listed commercial banks in Kenya and to investigate the relationship between sovereign credit ratings and liquidity of listed commercial banks in Kenya”. Credit ratings-Asset liquidity relationship was analyzed based on the theories of signal, pecking order and trade off theory. Correlational study design was employed through the use of data obtained from CBK for 31 commercial banks out of the targeted 42 banks in Kenya. Credit ratings data was collected from 28 banks that utilize Moody’s ratings and 3 banks that uses Fitch ratings. Given that the ratings scales have different scores with varying numerical strength, the researcher developed unified rating scores that entailed the following: for the investment ratings scores (highest rating, high-grade, upper-medium grade, medium grade and lowest grade), speculative ratings (“speculative elements with moderate credit risk, speculative with substantial credit risk, speculative and subject to high credit risk, speculative with poor standing, speculative and near default”) and sovereign ratings were measured through (high credit worthiness, sufficient credit worthiness, low credit worthiness and very low credit worthiness). Multiple linear regression technique was utilized in the analysis of data. The study results reported that credit ratings explain the variation in asset liquidity by 41.19%. The study found out that investment ratings have “a positive and significant relationship with asset liquidity of commercial banks in Kenya”. The study reported that speculative ratings have “a positive and significant relationship with asset liquidity of commercial banks in Kenya”. “The study also found out that sovereign ratings have a positive and non-significant relationship with asset liquidity of commercial banks in Kenya”. The study concludes that credit ratings influence asset quality of commercial banks through investment and speculative ratings. The study recommends that CBK and Bank directors develop policy regulation that will strengthen the credit ratings of banks as a way to improve asset liquidity of banks.