The Effect Of Asset Liability Management On Financial Performance Of Microfinance Banks In Kenya

Abstract

Asset liability management is an approach that provides institutions with protection that makes such risk acceptable. Asset-liability management models enable institutions to measure and monitor risk, and provide suitable strategies for their management. Following the financial liberation of the finance sector in Kenya, there has been a tremendous growth of commercial banks that have intensified competition in the banking industry. This has triggered the need for risk management among banks to minimize risks of financial loss and thus boost financial performance. To achieve the objective of this study the researcher used a descriptive research design to establish the relationship between asset liability management and profitability of microfinance banks in Kenya. The study carried out a census survey of nine (9) microfinance banks that had been in operation for five years (2010-2014). The study used secondary sources of data since the nature of data to be collected is quantitative. Secondary data was obtained from the association of microfinance banks in Kenya (AMFI) based on availability and accessibility. The data was extracted from audited financial statements of microfinance banks for the period of five years (2010-2014). Data selection was done based on the measurements of the variables under investigation. Data analysis was done using decretive statistics, correlation analysis and regression analysis. The findings concluded that most microfinance banks were not able maintain optimal levels of assets and liability and thus were unable to meet their short-term financial obligations. The findings also revealed that asset quality increased rapidly over the years. Microfinance banks gave out huge loans and advances that contributed to increased non-performing loans, this impacted negatively on asset and liability management leading to poor financial performance of microfinance banks. The correlation results concluded that there was no correlation between asset quality, liquidity and firm size with financial performance of microfinance banks in Kenya apart from operating efficiency which was strongly correlated to financial performance of microfinance banks in Kenya. The regression results concluded that asset and liability management was negatively related to profitability of microfinance banks in Kenya. Logarithm of assets and operating efficiency were found to be statistically significant in the model. On the contrary, asset quality and liquidity were found to be statistically insignificant because their probability values were above 5%. The limitation for this study is that it utilized secondary sources of data that are prepared under accounting and financial reporting assumptions and concepts which are subjective and might not be uniformly applied especially in terms of provisions and estimates. The study further recommends that the role of Asset liability committees has grown in its importance in the management of balance sheet, liquidity risks and in the implementation of liquidity risk management strategies. Hence, there is need for further research on the role of this important committee with a view to coming up with recommendation to strengthen the committees role in banking institutions.