Effect of Treasury Management on Financial Performance of Commercial Banks in Kenya

Abstract

The vital role of treasury management in the banking industry greatly influences how well commercial banks operate financially. Treasury management practices, specifically cash management, investment management, and funding management are the focus of the research. The metrics used for treasury management were cash ratio, YOI, LDR and CAR. ROA was used to measure financial health. Focused on 39 licensed commercial banks in Kenya. Secondary data sources such as respective websites and audited annual reports was used for analysis for the period 2018-2022. Descriptive statistics, including panel regression using SPSS version 20, were utilized for analysis of quantitative data. Theories such as agency theory, which spotlight the principal-agent dynamic within organizations, shedding light on potential conflicts of interest that arise when managerial decisions misalign with shareholders' interests. The pecking order theory emphasizes that organizations give priority to internal funds, followed by debt, and, as a final resort, equity issuance. Effective treasury management optimizes the utilization of these funding sources to enhance financial performance and the MPT underscores the importance of diversification and risk management in investment decisions, ultimately leading to improved financial performance. The R-square proves that treasury management has a moderate influence on return on assets in commercial banks. Independent variables (CASH-RATIO, YOI, LDR), explain 44.8% (R-Square) of ROA in commercial banks in Kenya. Cash management, investment management, and funding management practices have a substantial impact on a bank's ROA, with optimal management strategies contributing positively to profitability. Moreover, the research identifies the role of capital adequacy in moderating the relationship, underscoring the importance of maintaining a strong capital base in achieving sustainable financial performance. The results of this research offer critical insights for commercial banks in Kenya, aiding them in the development of strategies to enhance their financial performance. Regulators and policymakers can utilize these findings to fine-tune regulatory guidelines that promote prudent treasury management practices within the banking industry. The study contributes to a deeper understanding of the intricate influence of treasury management on financial performance, shedding light on opportunities for growth and stability within Kenya's banking