Abstract: Recently, banking sector in Kenya has been experiencing liquidity problems mainly funding liquidity and market liquidity risks. Most of the banks which exposed themselves to severe liquidity risks did not have the requisite framework to support the risks inherent in individual business lines or products, and, therefore, did not align the risks to the bank’s own risk tolerance. Thus, the purpose of this study was to investigate the effects of liquidity risk on the performance of commercial banks in Meru Town and it was guided by the following specific objectives: to establish the effects of cash reserves on the performance of commercial banks in Kenya, to assess the effects of deposits on the performance of commercial banks in Kenya and to determine the effects of non-performing loans on the performance of commercial banks in Kenya. This study adopted descriptive research; the entire population of all commercial banks in Kenya is 44. The target population in this study comprised of the Branch Managers, Operations Managers and Credit Officers working in all the 24 commercial banks in Meru Town totaling to 72 respondents. Total population and purposive sampling were used to select the cases to be studied. The data was then summarized, coded, tabulated and analyzed using Statistical Package for Social Sciences (SPSS) version 24. The findings obtained show that cash reserves affected liquidity as well as the performance of commercial banks. This is evidenced by the correlation and regression results that reports such relationship. Cash reserves also enabled continuity of operations and this was vital in keeping the banks afloat in the market. Having deposits in banks was important since this affected liquidity and eventually performance in commercial banks. Indeed positive and significant relationships were found out between these deposits and performance in banks. The level of deposits could make or destroy the bank. When there were few deposits, performance in the banks could be imperiled due to liquidity problems. Such banks could be forced to content with borrowing from central bank or inter-banks market at high costs. It was also established that non-performing loans affect the performance of commercial banks. This can be evidenced by positive relationships obtained in regression and correlation analyses between the two variables. When banks were faced with a lot of non-performing loans, they faced liquidity challenges and this translated to loss of working capital, poor operation of routine tasks and less revenue. This goes on to put the banks at risk of liquidation. The fact that banks responded by putting in place stringent measures in the backdrop of non-performing loans means that banks could start losing revenue. This would reduce the profitability of the firm, face liquidity risks and record reduced performance. Informed by findings of the study, it is recommended that since cash reserves play a crucial role in enhancing liquidity and eventually the performance of commercial banks, it is important for banks officials to understand the legal and practical levels of liquidity required in their banks. Further, due to the fact that deposits enhanced liquidity in commercials, banks should put in place measures aimed at encouraging customers to keep on making deposits. The study recommends that there should be follow up studies in other counties for correlation purposes. Furthermore, each study variable could be studied singly using other research methods so as to understand them more. Since performance in banks could be as a result of other factors that are linked to liquidity issues, it is important to carry out studies that incorporate other variables that directly or indirectly affect the relationship that was studied in this current study such as government regulatory frameworks, changing interest regimes and, competition from unregulated financial institutions among others.
Keywords: Effects, Liquidity, Performance.
Title: Effects of Liquidity Risk on Performance of Commercial Banks in Meru Town, Kenya
Author: Muhari Jane Wanjiku, Dr. Kagiri Assumptah
International Journal of Management and Commerce Innovations
ISSN 2348-7585 (Online)
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