The Relationship Between Liquidity Risk and Financial Performance of Commercial Banks in Kenya

Abstract

The aim of this study was to determine the relationship between liquidity risk and financial performance of commercial banks in Kenya. The research used a descriptive research design. All commercial banks that were actively operational over the five fiscal years (1st January 2011- 31st December, 2015) formed the targeted population for the study. Secondary data on the net profits, gross loans, gross non-performing loans, liquidity ratio, customer deposits, and total assets was retrieved from the publications of the annual reports to accomplish the research objectives. With the help of the Statistical Package for Social Sciences (SPSS), the data was analyzed using descriptive statistics, correlation and regression analysis as these are conventionally approved tools for descriptive research designs. The findings indicate that approximately 24.5% of the variation in the commercial banks’ return on assets over the period covered by the study resulted from the variation in their management efficiency, capital adequacy, asset quality and liquidity risk. The test of significance of the regression model suggests that it is significant at the 0.05. The study concludes that liquidity risk has a significant influence on the financial performance of commercial banks in Kenya. Future studies should use a composite measure of bank performance that includes both qualitative aspects (such as customer satisfaction) and quantitative measures such as return on equity, net interest margin and return on assets should be adopted to ascertain how liquidity risk influences commercial banks' performance.