Abstract: The Kenyan banking sector has experienced liquidity challenges over the years that have seen banks collapsing. The liquidity ratios have been fluctuating as per the bank annual supervision reports which if not mitigated could pose liquidity risk, hence contagion effect. The general objective of this study was to ascertain the determinants of commercial banks liquidity risk in Kenya. Panel data obtained from a representative sample of 37 licensed commercial banks for the period ranging 2008 to 2016 was obtained from Central Bank’s website. The study employed a fixed effect regression analysis using E-views 9.5 software to determine the influence of capital adequacy, profitability, loan growth and interbank rates on commercial banks liquidity risk in Kenya. Relevant diagnostic tests were also conducted to identify for any presence of econometric problems before the model was considered fit for inferential analysis. A negative and significant effect of profitability on bank liquidity risk existed. A similar effect was realized with increase in bank capital adequacy which had a negative and significant effect on bank liquidity risk, same effect experienced with an increase in inter-bank rate though not significant. However, a unit increase in commercial bank loans had a positive and significant effect on liquidity risk. All the tests were conducted at 5% significance level. The study recommends the Central Bank of Kenya to closely monitor liquidity levels of commercial banks and adjust liquidity among the banks where the banks may be in such sudden needs.
Keywords: Bank Liquidity Risk, Capital Adequacy, Interbank Rate, Profitability, Loan Growth.
Title: Determinants of Commercial Banks Liquidity Risk in Kenya
Author: Philip Waliaro Esokomi, Dr. Tobias Olweny
International Journal of Social Science and Humanities Research
ISSN 2348-3156 (Print), ISSN 2348-3164 (online)
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