The effect of asset liability management on the liquidity risk of commercial banks in Kenya

Abstract

Liquidity is an important determinant of financial distress. The objective of liquidity management thus is to ensure that banks are able to meet in full all their financial obligations as they fall due. Banks liquidity is directly affected by asset liability management decisions in the management of the balance sheet of commercial banks. Asset liability management involves the management of the total balance sheet dynamics and it involves quantification of risks and conscious decision making with regard to asset liability structure in order to maximize the interest earnings within the framework of perceived risks. The main objective of asset liability management is not to eradicate or eliminate risk, but to manage it in a way that the volatility of net interest income is minimized in the short run and economic value of the bank is protected in the long run. The objective of the study was to investigate the effect of Asset liability management on the liquidity risk on the commercial banks in Kenya. The study adopted a descriptive design in its methodology and the researcher chose to study on commercial banks due to availability of needed data and convenience. All the 43 commercial banks in Kenya were targeted for this study. Secondary data was obtained from annual Central bank of Kenya Banks supervision reports as well as banks annual and published financial reports while primary data was also collected by questionnaire method to supplement the secondary data. Out of the 43 questionnaires issued, 35 questionnaires were returned fully completed representing 81.3%, while 8 questionnaires were not returned representing 18.6% of the total questionnaires distributed to the respondents. SPSS version 20.0 was used for data analysis. The test for significance was t-test and computing the correlation coefficient (r), coefficient of determination and analysis of variance (ANOVA). The results of the regression analysis shows that there is a significant positive relationship between independent variables (return on equity, capital adequacy, loan to deposit ratio, return on assets, total assets, asset liability management policies, liquidity stress testing and contingency funding plan) and the dependent variable i.e. liquidity risk of commercial banks). The findings of the analysis conclude that independent variables have an effect on the liquidity risk of commercial banks in Kenya. The research gives the following recommendations for policy: Commercial banks need to place greater emphasis on developing an integrated view of risks facing the banks; Asset liability committees and risk managers should implement robust and comprehensive balance sheet management approaches; management should also ensure there are effective liquidity management strategies. Lastly, this research study forms the basis for further research to be extended to other financial institutions that were relevant to the study such as Microfinance institutions (MFls) but were not covered. A further research could also be carried out on the role of Asset liability committee with a view to coming up with recommendation to strengthen its role in the management bank risks. Lastly, a research could be carried on the factors that influence liquidity levels of commercial banks in Kenya.