The effects of capital adequacy requirements on liquidity of commercial banks in Kenya

Abstract

The purpose of this study was to provide a better understanding on the effects of capital adequacy requirements on liquidity of commercial banks in Kenya. A research to determine the effects of capital adequacy requirements on liquidity was therefore carried out in order to bridge the gap in knowledge that is lacking by first understanding the effects of Capital adequacy on the commercial banks liquidity for all Commercial Banks in Kenya. Based on this research objective, a review of the relevant literature has been conducted, which was used to guide this study's data collection. A descriptive research design was employed. The target population of interest in was all the 43 commercial banks in Kenya. The data was collected from the secondary sources. The data was obtained from the CBK financial reports of 2010-2014 for all the banks in Kenya.The data was analyzed using descriptive statistics, regression and correlation analysis and analyzed using SPSS version 21.The study found that there was strong correlation coefficient between bank Liquidity Ratio and all independent variables. The findings concluded that capital adequacy, size of the bank and GDP growth rate all have a significant effects on liquidity ratio of commercial banks in Kenya. However size of the bank had the highest influence on liquidity ratio in banks followed by capital adequacy and GDP growth rate. With this finding in mind, the researcher recommends that the banks should reduce cash conversion cycle period so as it can lead the company liquidity higher. A careful reduction of cash conversion cycle period will improve the liquidity of a bank and excess cash can be reinvested in the bank.