The Effects of Asset Liability Management on the Financial Performance of Commercial Banks in Kenya

Abstract

Commercial banks are the oldest and most diversified of all financial intermediaries. A sound, progressive and dynamic banking system is a fundamental requirement for economic development. As an important segment of the tertiary sector of an economy, commercial banks act as the backbone of economic growth and prosperity by acting as a catalyst in the process of development. At the macro level, a sound and profitable banking sector is better able to withstand negative shocks and contributes to the stability of the financial system. ALM is considered a strategic discipline that influences the financial performance. However, ALM has her own challenges since each client has a particular objective, risk tolerances, and constraints, and it would be difficult to devise an optimization algorithm that would realistically account for these specific characteristics when evaluating portfolio allocation decisions. This study sought to establish the effect of ALM on the financial performance of the banks. To achieve this objective, the study employed a descriptive research design to study the relationship between ALM and financial performance of the banks. The study collected data on assets and liabilities all commercial banks supervised by CBK for the period between 2010-2014. Inferential statistics such as correlation and regression were adopted to establish the relationship and effect of the ALM on the financial performance of banks. The study found that quality of assets affects the financial performance of banks. The proportion of NPL to total loans was found to have an inverse relationship with financial performance. The level of liquidity had a significant relationship with financial performance. An increase in liabilities to assets negatively affected the financial performance of banks and vice versa. There was significant relationship between operational efficiency and financial performance of banks. Capital adequacy had insignificant relationship with ROE of banks. The findings shows that ALM such as loans, liability levels, levels of efficiency have a direct effect on the performance of banks.