The Relationship Between Profitability and Liquidity of Commercial Banks in Kenya

Abstract

The study sought to establish the relationship between the profitability and the liquidity of commercial banks in Kenya. Liquid assets are less profitable as compared to long term assets. The dilemma to a finance manager is whether to invest in more profitable long term assets and risk low liquidity or invest in short term assets which are less profitable and therefore reduce return on investment made. The aim of this study was to establish whether the profitability of commercial banks is affected by the liquidity levels of the bank. The population of the study was comprised of all 44 commercial banks in Kenya operating in the years 2008 to 2012. For a bank to qualify it needed to have been in operation during the whole period of the study and therefore institutions that merged or were not in operation in the whole period of study were eliminated. The study involved secondary data collection of the return on assets, to measure profitability and CBK liquidity ratio and current ratio to measure liquidity during a specific year. The study used secondary data obtained from audited financial statements of the banks at the end of the years of study. The study used descriptive statistics and regression analysis to establish the relationship between the study variables. The response rate was 73% that is a total 29 out of 40 that satisfied the data collection criteria. The study found out that there is a positive relationship between profitability and liquidity of commercial banks in Kenya; however, the coefficients from the study are not significant. Liquidity is found to be one of the determinants of profitability of commercial banks in Kenya over the years of study. The study recommends that the finance managers of commercial banks maintain a balance between the level of liquid assets and long term assets to reinforce each of the conflicting objectives of maintaining adequate liquidity and sustainable profitability. Additionally the liquidity requirements that have been set by CBK need to be maintained and strengthened since liquidity is found to have a positive effect on profitability of commercial banks stability and growth of the entire financial and economic.