The Relationship Between Liquidity and Operational Risk of Commercial Banks in Kenya

Abstract

The purpose of this study was to determine the relationship between liquidity and operational risk of commercial banks in Kenya. The study objective was to establish the influence of liquidity, asset quality, bank size, capital adequacy and ownership type on operational risk of commercial banks. This study adopted a descriptive survey design and targeted the 43 fully operational commercial banks in Kenya as at December 2015. However, three of these banks had been placed under receivership, thus excluded from the study. Thus, a survey of 40 commercial banks that had complete data was used. Data analysis was done using descriptive statistics, Pearson’s correlation coefficient and regression analysis. The study found out that bank size, asset quality, liquidity and capital adequacy were satisfactory variables in explaining the operational risk of commercial banks in Kenya, supported by a coefficient of determination of 60.1%. Result findings revealed that bank size was positively and significantly related to operational risk of a commercial bank (2.802, 0.053). The findings revealed that asset quality and the operational risk of a commercial bank is positively and significantly related (r=13.042, p=0. 001); liquidity and operational risk of commercial banks are negatively and significantly related (r= -7.025, p=0.030); capital adequacy and operational risk are negatively and significantly related (-15.4, 0.025), while binary logistic results showed that ownership type was statistically significant (indicated by a p value of 0.014), negatively and significant predictor of operational risk (r= -0.082, p=0.011). The study concluded that bank’s size, asset quality, liquidity, capital adequacy and ownership type affect the operational risk of a bank. Liquidity, capital adequacy and ownership type were found to have an inverse relationship with the operational risk of a bank. The study recommended that, commercial banks should focus on maintaining high levels of liquidity and capital adequacy, so as to enhance performance by cushioning themselves against operational risk. The study also recommends upgrading of internal control systems, to detect attempted frauds and so cushion banks against financial loss by fraudsters.