Asset Liability Management, Macroeconomic Factors, Bank Characteristics and Profitability of Commercial Banks in Kenya

Abstract

Commercial banks have a key role in resource allocation in the economy. They channel funds from surplus to deficit units. Banks focus on integrated balance sheet management where all the relevant factors which affect financial performance are considered, analyzed and evaluated in the present asset liability management system. The study sought to determine the influence of macroeconomic factors and bank characteristics on the relationship between asset liability management and profitability among commercial banks in Kenya. The specific objectives were to determine; the effect of asset liability management on profitability among commercial banks in Kenya; the influence of macroeconomic factors on the relationship between asset liability management and profitability among commercial banks in Kenya; the influence of bank characteristics on the relationship between asset liability management and profitability among commercial banks in Kenya; and the joint effect of asset liability management, macroeconomic factors and bank characteristics on the profitability among commercial banks in Kenya. The study was anchored on liability management theory and also drew its theoretical support from commercial loan theory, the market power theory and the efficient structure theory. The study was guided by the positivism philosophical paradigm as predictions were made on the basis of established theories and actual observations of realities. The population of the study was the 42 commercial banks in Kenya that were registered between 2015 and 2020. Secondary data was obtained from the annual reports of CBK and audited banks’ financial statements from 2015 to 2020. Data was analyzed using descriptive and inferential statistics. Hypotheses were tested using both simple and multivariate regression analysis while stepwise regression analysis was used to test for moderating and intervening effects. The findings revealed that asset liability management had a statistically significant influence on the profitability among commercial banks in Kenya (R2=0.0089, F=9.79 and p = 0.008). Macroeconomic factors were found to have a statistically significant moderating influence on the relationship between asset liability management and profitability among commercial banks in Kenya (R2=0.1643, F=9.05 and p = 0.000). Similarly, the mediating role of bank characteristics on the relationship between asset liability management and profitability among commercial banks in Kenya was found to be statistically significant (R2=0.1306, F=5.26 and p=0.0003). The findings revealed a statistically significant positive joint influence of asset liability management, macroeconomic factors and bank characteristics on profitability among commercial banks in Kenya (R2=0.0974, F=5.50 and p=0.0001). The study has contributed to theory, policy and management in relation to how macroeconomic factors and bank characteristics influences relationship between asset liability management and profitability among commercial banks in Kenya. In light of these findings, banks should ensure that asset liability management policies are crafted based on appropriate strategies for profitability enhancement. The study recommends that policy makers should enhance the economic growth and develop strategies to control inflation levels for the banking sector to thrive.