Determinants of liquidity of commercial Banks in Kenya: An empirical study

Abstract

The paper empirically analyzed the determinants of the liquidity of the commercial banks in Kenya using a multiple linear regression model. The motivation was to establish whether the determinants of liquidity are empirically robust. The focus was exclusively on a cross section of 30 commercial banks in Kenya. This was because earlier crosscountry studies recommended country-specific empirical investigation as an area warranting further research. Employing the linear regression model uncovered an economically meaningful relationship between bank's liquidity and its determinants. The findings from a cross sectional analyses indicate that significant factors that determine the liquidity of the commercial banks in Kenya are liquid liabilities, growth and maturity. Liquid liabilities and maturity have a positive impact on liquidity whereas growth has a negative impact. The other factors such as liquid assets and cash flows have a positive but insignificant effect on the liquidity of commercial banks. Similarly, leverage, size, profitability and loan commitments have an insignificant negative effect on banks' liquidity. The estimated model results indicate that all the variables included in the model significantly determines 80 percent of the variation in liquidity. The findings further -.. indicate that the estimation results are free from any problems of normality and heterogeneity as shown by the normality and hetero~eneity test results. The model also fits the data correctly as indicated by the post-estimation results. The implication of these findings is that the Central Bank of Kenya needs to devise legal requirements that give benchmarks of the above ratios to ensure a sustainable liquidity of the commercial banks. This will help create a stable banking and financial sector that provides a conducive environment for sustainable economic growth and development.