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Liquidity Risk and Financial Performance of Commercial Banks in Kenya

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  • Jane Gathigia Muriithi
  • Kennedy Munyua Waweru

Abstract

The focus of this study was to examine the effect of liquidity risk on financial performance of commercial banks in Kenya. The period of interest was between year 2005 and 2014 for all the 43 registered commercial banks in Kenya. Liquidity risk was measured by liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) while financial performance by return on equity (ROE). Data was collected from commercial banks¡¯ financial statements filed with the Central Bank of Kenya. Panel data techniques of random effects estimation and generalized method of moments (GMM) were used to purge time-invariant unobserved firm specific effects and to mitigate potential endogeneity problems. Pairwise correlations between the variables were carried out. Wald and F- tests were used to determine the significance of the regression while the coefficient of determination, within and between, was used to determine how much variation in dependent variable is explained by independent variables. Findings indicate that NSFR is negatively associated with bank profitability both in long run and short run while LCR does not significantly influence the financial performance of commercial banks in Kenya both in long run and short run. However, the overall effect was that liquidity risk has a negative effect on financial performance. It is therefore advisable for a bank¡¯s management to pay the required attention to the liquidity management.

Suggested Citation

  • Jane Gathigia Muriithi & Kennedy Munyua Waweru, 2017. "Liquidity Risk and Financial Performance of Commercial Banks in Kenya," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 9(3), pages 256-265, March.
    • Handle: RePEc:ibn:ijefaa:v:9:y:2017:i:3:p:256-265
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    References listed on IDEAS

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    1. Gaston Giordana & Ingmar Schumacher, 2011. "The Impact of the Basel III Liquidity Regulations on the Bank Lending Channel: A Luxembourg case study," BCL working papers 61, Central Bank of Luxembourg.
    2. Koziol, Christian & Lawrenz, Jochen, 2009. "What makes a bank risky? Insights from the optimal capital structure of banks," Journal of Banking & Finance, Elsevier, vol. 33(5), pages 861-873, May.
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    Cited by:

    1. Olajide Solomon Fadun & Diekolola Oye, 2020. "Impacts of Operational Risk Management on Financial Performance:A Case of Commercial Banks in Nigeria," International Journal of Finance & Banking Studies, Center for the Strategic Studies in Business and Finance, vol. 9(1), pages 22-35, January.
    2. Alette Tammenga & Pieter Haarman, 2020. "Liquidity risk regulation and its practical implications for banks: the introduction and effects of the Liquidity Coverage Ratio," Maandblad Voor Accountancy en Bedrijfseconomie Articles, Maandblad Voor Accountancy en Bedrijfseconomie, vol. 94(9-10), pages 367-378, October.
    3. Kah Chon, Ooi, 2019. "Impacts Of Firm-Specific Factors And Macroeconomic Factors Against Microsoft’S Performance," MPRA Paper 97254, University Library of Munich, Germany, revised 15 Nov 2019.
    4. Benjamin Otwoko & Kimani Maina, 2021. "Effect of liquidity risk on the financial performance of deposit taking savings and credit cooperative organisations (SACCOs) in Kenya," International Journal of Research in Business and Social Science (2147-4478), Center for the Strategic Studies in Business and Finance, vol. 10(2), pages 203-211, March.
    5. narjess BOUABDALLAH & jamel Eddine HENCHIRI, 2020. "L' impact des mécanismes de gouvernance interne sur le risque opérationnel bancaire," Journal of Academic Finance, RED research unit, university of Gabes, Tunisia, vol. 11(1), pages 151-189, June.
    6. Gloria Dhahabu & Gitonga Doreen & Barasa Eliakim & Moses Kiarie & Ruth Kibaara & Dismas Omimi & Evusa Zablon & Ngeta Jacqueline, 2022. "Effect of Financial Risks on Financial Performance of Tier One Commercial Banks in Kenya," International Journal of Research and Innovation in Social Science, International Journal of Research and Innovation in Social Science (IJRISS), vol. 6(6), pages 261-270, June.

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    More about this item

    Keywords

    liquidity risk; liquidity coverage ratio; net stable funding ratio; return on equity;
    All these keywords.

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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