Effects of Liquidity Management on the Financial Performance of the Banks Listed at the Nairobi Securities Exchange

Abstract

For the past few years, the Kenya banking sector has seen some banks collapse despite posting impressive performances. All pointers have always indicated that they had been experiencing liquidity issues. The objective of this study was to establish the effect of liquidity management on the financial performance of the banks listed at the NSE. A descriptive research design was used in this study. The study targeted all the eleven commercial banks listed in Kenya between 2016 and 2020. Secondary data from commercial banks' annual reports was collected using data collection sheet. Financial ratios were calculated and used for analysis. Cross-sectional and time-series data was used for the study. STATA 13 generated descriptive and inferential analytical statistics. From the descriptive statistics, the listed commercial banks showed an average ROA of 2.1547. Liquidity management as measured by liquidity ratio averaged at 43.9%. Capital adequacy as measured by total capital to total risk weighted assets ratio showed a mean of 17.22%. Core capital to total deposit liabilities had a mean of 17.342% for the period between 2016 and 2020. From the regression analysis, the fixed effect model showed an R squared (within) of 0.3473. The findings exhibited that liquidity management had an adverse significant effect on ROA. On the flip side, capital adequacy and core capital to total deposit liabilities showed a positive but insignificant effect on ROA. This study recommends that listed banks should balance between the levels of liquidity to hold and pursuit opportunities that results in profitability in a manner that does not jeopardize the operations of the banks. The banks should also operate within the minimum statutory required ratios as per the CBK guidelines on liquidity ratios, capital adequacy ratio as well as the core capital to total deposit ratios. From the ratios computed the entire sector on average operated within the required limits.