EFFECT OF LIQUIDITY RISK DETERMINANTS ON FINANCIAL PERFORMANCE OF COMMERCIAL BANKS LISTED AT NAIROBI SECURITIES EXCHANGE, KENYA

Abstract

Commercial banks play a crucial role of providing liquidity in the financial market. In performing this role, banks are inherently exposed to liquidity risk. Liquidity risk arises from the fundamental role of banks in the maturity transformation of short term deposits into long term loans. The overall objective of this study was to examine the effect of liquidity risk determinants on financial performance of commercial banks listed at the Nairobi Securities Exchange. The research used a descriptive survey research design. The target population comprised of the 11 commercial banks listed at the Nairobi Securities Exchange. The study made use of primary and secondary data. A questionnaire was used to collect the primary data. A sample of 42 members of the assets and liabilities management committee was used. Secondary data was collected from banks annual reports submitted to the Central Bank of Kenya. Stratified sampling technique was used to select members of the sample. The study found that liquidity level had a positive effect on return on assets for listed commercial banks but the effect was not significant. Data was analyzed using multiple regression methodology in accordance with the objectives of the study. Correlation analysis was used to determine the relationship between liquidity risk determinants and financial performance. The study found that capital adequacy had a significant positive effect on return on assets for commercial banks listed on the Nairobi Securities Exchange. It was found that for commercial banks listed on the Nairobi Securities Exchange, asset quality had a significant positive effect on return on assets. Also the study found that found that inflation had a significant negative effect on return on assets for commercial banks listed on the Nairobi Securities Exchange. The study concluded that that liquidity levels had a positive effect on financial performance of listed commercial banks but the effect was not significant. It also concluded that concluded that capital adequacy had a positive and significant effect on the financial performance of listed commercial banks. The study makes the following recommendations; that to optimize financial performance, commercial banks listed on the Nairobi Securities Exchange should identify and maintain optimal levels of liquidity to optimize financial performance; listed commercial banks should increase the amount of core capital since capital adequacy was noted to have a positive effect on financial performance. Further the study recommends that commercial banks should contract and maintain high quality assets especially the loan portfolios and should also devise strategies to protect themselves against high inflation rates as well as inflation volatility.