Effects of micro and macro-economic factors on bank liquidity in Kenya

Abstract

Liquidity is the ability of a bank to fund increases in assets and meet obligations as they come due, without incurring unacceptable losses (Guidance on Liquidity Risk Management, 2009)Liquidity can come from direct cash holdings in currency or on account at the central bank. More frequently, it comes from acquiring securities that can be sold quickly with minimal loss. This states highly creditworthy securities, comprising of government bills, which have short term maturities. The topic of this study is to determine the effects of micro and macro-economic factors of bank liquidity in Kenya; the specific objectives are; to determine the effects of macroeconomic factors on bank liquidity; to determine the effects of microeconomic factors on banks liquidity and to determine the combined effect of macroeconomic and microeconomic factors on banks liquidity. The study used the following theories to guide; Commercial Loan theory; The Shiftability Theory and the Anticipated Income Theory of Liquidity. The researcher used descriptive research design because it obtained information concerning the current status of bank liquidity. The population of the study consisted of 37 commercial banks in Kenya as of 2016. A census study of all banks that have been in operation for the past 5 years were included in the study. This population is small, therefore, there will be no sampling. Multiple regression analysis was applied to the data to examine the effect of level of customer’s deposits, loan growth, capital adequacy, profitability and other effects macroeconomic factors on bank liquidity in Kenya. The results of multiple regressions suggest that the selected independent variables explain more than 10.8% changes in the net profit. By analyzing the other statistical results of multiple regressions we found that the results are very much consistent with the simple regression. All the results are not statistically significant and overall the study provides an idea that macro and micro factors are not the basic determinants of profitability in the banking sector. So it can be inferred that this promising and potential sector in Kenya can flourish very fast and enhance profitability by improving its liquidity position and operating efficiency. The government as a bank regulator through the CBK should adopt policies that ensure increased bank performance. Strict conditions of minimum liquidity and capital should continue being emphasized on to ensure none of the banks has lower of the two. Increased bank performance leads to general economic growth.