Effect of asset quality and liquidity on financial performance of Commercial Banks in Kenya

Abstract

The object of the study was to assess the effect of asset quality and liquidity on financial performance of commercial banks in Kenya. The study deployed explanatory research design using panel data. The period covered was 13 years from 2010 to 2022. Secondary data were mined from individual banks' published audited financial reports and also from annual reports published by the Central Bank of Kenya. A total of 38 commercial banks licensed in Kenya as at December 31st, 2022 were covered under census. Both descriptive and inferential statistics analyses were generated using Stata Soft Ware version 17.0 and Microsoft Excel. Regression analyses were applied to test the hypothesis. Tables and figures were used for data presentation. Based on the findings, asset quality had a statistically significant but negative impact on financial performance. Liquidity, on the other hand, indicated positive but non-statistical significance on financial performance. However, cumulatively, both factors had a statistically significant influence on financial performance. For a bank to survive in the current tempestuous financial climate, the management has to put more emphasis on credit ratings before issuing loans to clients. In addition, the regulatory authorities should relentlessly pursue stringent liquidity policies. All the recommended procedures are in line with the Anticipated Income Theory. This study contributes immensely to the prominence roles credit risk and liquidity risk management framework play in commercial banks’ operations.