Determinants of liquidity risk of commercial banks in Kenya

Abstract

The objective of this study was to establish the determinants of liquidity risk for commercial banks in Kenya. The study employed a descriptive research design. A census targeting the 43 commercial banks licensed in Kenya between 2010 and 2014 was conducted. The study used secondary data obtained from the Central Bank of Kenya website and the respective banks website. Multiple regression analysis was used to evaluate the determinants of liquidity risk.Capital adequacy ratio, liquid assets ratio, ownership type, size and leverage were regressed on loan to deposit ratio. The coefficient of determination R2 was used to evaluate the explanatory power of the regression. Analysis of variance (ANOVA) was used to test significance of the regression result at 5% level. The result of regression indicated that capital adequacy had positive effect on liquidity risk while liquid asset ratio, ownership type, size and leverage had negative effect. The coefficient of determination R2 for the regression model was found to be 0.185, indicating that the model had a moderate explanatory power. The result of analysis of variance indicated that capital adequacy, liquid asset ratio, ownership type, size and leverage were significant determinants of liquidity risk at 5% significance level. The study concluded that capital adequacy ratio, liquid asset ratio, ownership type, size and leverage were significant determinants of liquidity risk. The study recommends that bank managers can effectively manage liquidity risk by collectively focusing on capital adequacy, liquid asset ratio, ownership type, size and leverage. Further studies may seek to identify qualitative factors that influence liquidity risk, the effect of macroeconomic factors on liquidity risk, evaluating the strategies that managers use to mitigate exposure to liquidity risk.