Effect of Banking Liquidity Factors on Performance of Commercial Banks in Kisumu City, Kenya

Abstract

Financial institutions and markets literature show that capital adequacy, loan growth and percentage of non-performing loans are important drivers of bank liquidity and performance. Despite the important role played by these factors, the effect of capital adequacy on bank performance, the relationship between loan growth and bank performance and the effect of non-performing loans on bank performance were unknown. The purpose of this study was therefore to investigate the effect of the banking liquidity factors on performance of commercial banks in Kisumu City, Kenya. Specific objectives of the study were to: establish the effect of capital adequacy on performance of commercial banks, determine the relationship between loan growth and performance of commercial banks and establish the effect of percentage of non-performing loans on performance of commercial banks in Kisumu City. The study was guided by an adapted conceptual framework with banking liquidity factors as independent variables and bank's performance as the dependent variable. A correlational research design was employed. The target population was all the 27 commercial banks operating in Kisumu City for a period of five years 2010 to 2014 yielding 135 data points. Secondary data was collected through desk review. Data was analyzed using descriptive statistics such as mean and standard deviation and inferential statistics namely Pearson's correlation and multiple regression analysis. Data was presented using tables and matrices. The findings were that: capital adequacy is a significant positive predictor of performance measured in terms of return on equity (ROE), ~ = .023 (p = .003) meaning that enhancing capital adequacy leads to improved performance as measured in terms of ROE; loan growth was an insignificant negative predictor of performance measured in terms' of return on equity (ROE), ~ = -.056 (p = .424) implying that accelerated loan growth leads. tb decline in performance as measured in terms of ROE; non-performing loans is' an insignificant negative predictor of performance measured in terms of return on equity (ROE), ~ = -.005 (p = .257) meaning that that increase in non- performing loans lead to decline in performance as measured in terms of ROE. The study concludes that: that enhancing capital adequacy leads to improved performance as measured in terms of ROE; accelerated loan growth leads to decline in performance as measured in terms of ROE and increase in nonperforming loans lead to decline in performance as measured in terms of ROE. The study recommends that: commercial banks should continue to improving capital to enhance its adequacy as this was found to influence performance positively; should reduce the rateof growth of loans and reduce the percentage of non-performing loans as this were found to affect performance negatively. The research findings may be significant to bank liquidity policy makers in designing optimal liquidity level that maximize firm's value. It will also be useful to bank managers, financial advisors, CBK and depositors in designing bank policies and advising capital market investors respectively. The research may provide new empirical evidence on banking liquidity factors and bank's performance and form a basis for future research in the area.