Relationship Between Firm Liquidity and Financial Performance of Commercial Banks in Kenya

Abstract

Liquidity plays a significant role in the corporate financial performance of commercial banks. A bank should ensure that it does not suffer from lack of or excess liquidity to meet its short-term compulsions which may create financial performance issues. This study sought to determine the relationship between firm liquidity and financial performance of commercial banks in Kenya. This study utilized descriptive and correlational research design. This research targeted 39 commercial banks in Kenya between 2017 and 2021. The data sources were secondary. A data collection sheet was used to collect the data Commercial banks' annual reports were used to collect the data. Between 2017 and 2021, data were collected from commercial banks in Kenya. The annual reports were sourced from Central Bank of Kenya where all commercial banks publish their annual financial reports with. panel data was adopted for analysis. This research made use of annual data relating to the commercial banks between 2017 and 2021. Descriptive correlation and regression analysis were done via STATA 14. The study carried out diagnostic tests of multicollinearity, normality, heteroskedasticity and specification test. To examine the significance of the model the investigation adopted F-statistics via Analysis of Variance. From the findings, correlation analysis showed that firm liquidity had a correlation coefficient of -0.1063 indicating that firm liquidity had a weak negative relationship with financial performance. On the other hand, firm size showed a strong positive relationship with financial performance (Corr=0.6068). Capital Adequacy showed a weak negative relationship with financial performance (Corr=-0.0799) while asset quality showed a negative weak relationship shown by correlation coefficient of -0.0112. The correlation coefficient of firm size was significant while that of firm liquidity, capital adequacy and asset quality were insignificant. The study concludes that firm liquidity has a negative insignificant relationship with financial performance of commercial banks in Kenya. Firm size has a positive significant relationship; capital adequacy has an insignificant negative relationship; while asset quality has a negative insignificant relationship with financial performance of commercial banks in Kenya. The study recommends that commercial banks7in Kenya reduce their liquidity to optimal levels; increase their assets; reduce the unproductive assets; increase their revenue streams and levels; reduce their total liabilities; issue more shareholder's capital; sell their non-performing loans to collection agencies; and increase the gross loans extended to customers optimally. Future studies should adopt other factors influencing financial performance, other measures of variables, other periods of study; and adopt primary data.