Relationship between Macro-Economic Variables and Commercial Banks' Liquidity in Kisumu Central Business District, Kenya

Abstract

Financial institutions and markets literature show that monetary policies, government expenditure and economic cycles are important drivers of bank liquidity and liquidity is an important determinant of financial solvency. Despite the important role played by macroeconomic variables in influencing bank liquidity, the association between monetary policy and bank liquidity, the effect of government expenditure on bank liquidity and the effect of economic cycles on bank liquidity in Kisumu CBD are unknown. The purpose of this study was therefore to investigate the relationship between commercial banks' liquidity and macroeconomic variables in Kisumu CBD. Specific objectives of the study were to; establish the association between monetary policy and commercial banks liquidity level in Kisumu CBD, examine the effect of government expenditure on liquidity level of commercial banks in Kisumu CBD and determine the effect of economic cycle on liquidity of commercial banks in Kisumu CBD. The study was guided by a self-conceptualized framework with macroeconomic factors as independent variables and banks liquidity as the dependent variable. A correlational research design was employed. The target population was all the 28 commercial banks operating in Kisumu CBD. The study used both primary and secondary data. A semistructured self-administered questionnaire to three senior managers from each bank totaling to 84 managers was used to collect primary data. 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 analyses. Data was presented using tables and charts. The findings were that: the association between monetary policies and banks' liquidity was positive and significant (r = 0.559, p<O.Ol) implying that a positive change in monetary policy leads to an increase in bank liquidity, The relationship between government expenditure and banks' liquidity was positive and significant (r = 0.256, p<0.05) implying that government expenditure positively predicts bank liquidity and that the relationship between economic cycle and banks' liquidity was positive and significant(r = 0.336, p<0.05). The study concludes that the association between monetary policy al!d banks' liquidity is positive and significant, the effect of government expenditure and economic cycle were significant positive predictors of banks' liquidity. The study recommends that the CBK should continue tightening monetary policies, monitor government expenditure, economic cycle and make appropriate adjustments as these were found to influence banks' liquidity positively. 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 will provide new empirical evidence on macro-economic variables and bank's liquidity and form a basis for future research in the area.