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Masuku Veli M The importance of liquidity in the banking sector in any economy is well documented in literature as it is part and parcel of the CAMEL performance indicators used by CBK to measure banks’ performance. Meanwhile, the overall liquidity of the local banking sector has improved tremendously in the last decade, a critically analysis shows that most banks still maintain excess liquidity, which ordinarily should be invested in profit and economic activities. This study adopted an explanatory approach by using panel research design to fulfill its objectives. The first objective of this study was to determine and evaluate the effects of bank-specific factors; Interest rates spread, liquidity risk, Asset quality (credit risk), and government securities on the accumulation of excess liquidity of listed commercial banks in Kenya.
The second objective was to determine and evaluate the effects of macro/external factors; reserve requirement and CBK lending rate on the accumulation of excess liquidity of listed commercial banks in Kenya. This study tested the hypothesis that Bank specific factors affect listed commercial bank’s excess liquidity positively and the second hypothesis tested was that macro/external factors do not affect listed commercial bank’s excess liquidity significantly. The study accepted both hypotheses. Annual financial statements of the listed Kenyan commercial banks from 2003 to 2009 were collected from the CBK and Banking Survey 2010. The data was analyzed using multiple linear regressions method, and the fixed effects model was used in the regression analysis to empirically examine the relationship between excess liquidity and the explanatory variables. The analysis showed that all the bank specific factors had a statistically significant impact on excess liquidity, while the macro/external factors had no statistical significance on the excess liquidity of listed commercial banks in Kenya. Based on these findings it is clear that excess liquidity is caused by management inefficiencies. Further regulatory authorities have to come up with better policies of controlling the accumulation of excess liquidity both in the short run and long run. Further research on ways to economically utilize excess liquidity of commercials banks in the country could add value to the profitability of banks and economic growth in the country, because keeping excess and idle liquidity hinders economic development. |
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Last Updated on Wednesday, 23 November 2011 21:24 |
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