Leverage, liquidity and profitability of banks and insurance firms listed at the Nairobi Securities Exchange

Abstract

Banks and Insurance firms keep the finances of other firms and investors. When these firms engage in leverage activities, the result is felt by other firms and their liquidity levels affect both their performances and those of other investors. The study sought to establish the relationship between leverage and liquidity on profitability and determine the effect of leverage and liquidity on profitability of Banks and Insurance firms listed at the Nairobi Securities Exchange. A census study was done on all the seventeen Banks and Insurance firms listed at the NSE for a six year period beginning the year 2010 to the year 2015. Secondary data was collected from NSE handbooks and individual firms published financial statements for the respective years. Data was analyzed using correlation analysis and General linear models including ANOVA and regression analysis. Profitability was measured by two variables: ROA and ROE, Leverage was measured by use of leverage ratio while Liquidity was measured using liquidity ratio. Pearson correlation was applied to establish the relationship among variables. T-test was employed to determine the significance levels of the coefficient terms for each of the regressions while F-test was carried out at 95% confidence level to determine significance of regressions. R-square coefficient was used to measure the extent to which predictor variables explained the response variable. Durbin Watson statistic was conducted to find out whether there was autocorrelation among variables and analysis done with SPSS software. Findings show that a positive relationship exists between leverage and profitability expressed in terms of ROA while a negative insignificant relationship exists between leverage and profitability expressed in terms of ROE. Liquidity showed a negative relation with profitability when expressed in terms of ROA whereas a positive insignificant relationship exists between liquidity and profitability expressed in terms of ROE. When leverage and liquidity variables are combined, leverage effects are felt more than liquidity on profitability measured in terms of ROA whereas insignificant effects are observed in profitability measured in terms of ROE. The study recommends that managers need to gauge the appropriate leverage and liquidity levels to use for firms given their unique circumstances.