Effect of Liquidity on Financial Performance of Tier One Listed Commercial Banks in Kenya

A Research Project Report Submitted to the School of Business in Partial Fulfillment of the Requirement for the Degree of Masters in Business Administration (MBA)The purpose of this study was to examine the effect of liquidity on the financial performance of tier one listed commercial banks in Kenya. The study sought to address the following research questions; what is the effect of the liquidity coverage ratio on the financial performance of tier one listed commercial banks in Kenya? What is the effect of management efficiency on the financial performance of tier one listed commercial banks in Kenya? How does gross domestic product growth affect the financial performance of tier one listed commercial banks in Kenya? A descriptive research design was applied to the entire population of six tier one listed commercial banks in Kenya. This design presented an accurate representation of the study and made inferences of the target population. The primary data was collected using questionnaires which were completed by thirty-one respondents collectively from the six banks, who were ALCO members. The secondary data was collected from the individual bank websites, the regulator, Central Bank of Kenya, CBK and the Kenya National Bureau of Statistics, KNBS. Descriptive and inferential statistics were used to analyze the data, establishing the relationship between the independent variables and the dependent variable, financial performance measured through return on equity, ROE, and return on assets, ROA. Trend analysis, regression and correlation analysis results were found after using the Statistical Package of Social Sciences, SPSS, and Microsoft Excel as the analysis tools for the study. The findings of the study found that liquidity coverage ratio had no significant effect on ROE and a positive significant effect on ROA. An increase in liquidity coverage ratio leads to a decrease in ROE and an increase in ROA. Management efficiency had a strong positive non-significant effect on both ROE and ROA. An increase in management experience leads to an increase in financial performance. Gross Domestic Product growth had a strong positive non-significant effect on both ROE and ROA. An increase in gross domestic product growth would lead to an increase in ROE and ROA. The study concluded that commercial banks need to act accordingly during operations to get the desired financial performance, while maintaining the minimum required liquidity ratio. Noting the positive effect that management efficiency has on ROE and ROA, commercial banks need vi to ensure efficiency in their management. Commercial banks and stakeholders need to acknowledge the effect of GDP on bank performance and consider it in decisions and analysis. The recommendations of the study were: First, the regulator, CBK, needs to monitor the effect that maintaining LCR has on financial performance of banks as they ensure that the banks are compliant and good performers as a business. Second, commercial banks to have management understand the positive effect that their efficiency has on financial performance to promote efficiency and ultimately the bank financial performance. Finally, commercial banks and regulators as policy makers should monitor GDP noting its positive effect on bank financial performance. The study recommended future research on the period extending beyond December 31, 2015, in order to study the real effect of LCR on bank performance, noting the LCR gradual implementation by banks from January 1, 2015. The study also recommends future research on the factors affecting commercial banks LR noting that through the period of study, the trend performance was varied, yet each bank has more than 5% market share and is listed on the securities exchange. An additional recommendation for future research was on the effect of liquidity ratio on financial performance of commercial banks based on their ownership