Effect of Liquidity on Operational Efficiency of Listed Banks in Kenya

Abstract

Commercial Banks serves as financial intermediaries by ensuring flow of money from surplus to deficit units in the economy. The banking industry has been the engine behind the smooth running of the economy. The operational efficiency is meant to ensure quality delivery of service with least cost and no loss. The banking sector in Kenya has recorded remarkable growth though with minimal challenges in credit and operational risk. The banks are yet to develop a model that will ensure optimal level of liquidity and operational efficiency. With the guide of preference theory, shift ability, and anticipated income theory this study examined the effects of liquidity on the operational efficiency of listed Kenyan banks. The study specifically investigated the contribution of liquidity, asset quality, bank size and capital adequacy, on the banks’ efficiency. The study adopted descriptive research design. Secondary data was obtained from financial statements of 39 commercial banks in Kenya from 2016 -2020. Data was collected using data collection sheets. Annual financial statements were extracted from the banks’ websites. Data was analyzed using SPSS version 26, and Microsoft excel 2013.In testing significance of the model the researcher did F-test. F was 14.180, and p <0.05. Findings showed that operational efficiency was 1.37% with a standard deviation of 4.812.Average liquidity was 0.30%, capital adequacy was 0.11%, the bank size mean was 16.55, and asset quality was 0.12% indicating existence of non-performing loans in the banks. With regard to correlation summary, operational efficiency had a positive relationship with liquidity(r=0.040, p=0.576). Bank size had a negative relationship(r=-.015, p=0.831).Capital adequacy showed (r=0.472, p=0.000). Asset quality had a negative relationship with operational efficiency(r=-.023, p=0.752).This study found that capital adequacy and liquidity indicated a positive effect on the operational efficiency of listed banks in Kenya. This study forth concludes that asset quality resulted to a negative effect on operational efficiency of listed banks in Kenya. Finally, bank size had no significant effect on the operational efficiency of listed banks in Kenya.