INFLUENCE OF MACROECONOMIC VARIABLES ON LIQUIDITY OF COMMERCIAL BANKS IN KENYA
Abstract
This study focused on the influence of macroeconomic variables on liquidity of commercial banks in Kenya. The study adopted descriptive survey design and census technique was used to arrive at 43 commercial banks Kenya. The study adopted mixed research method in data collection. Secondary data was collected using a data collection sheet. Primary data was collected using a questionnaire. Data was edited, cleaned, codded and categorized then analyzed using SPSS version 22.0. The study adopted multiple regression model to establish the relationship between dependent variable and the independent variables and used correlation technique to analyze the degree of relationship between two variables with the Pearson correlation coefficient (r). Presentation of results was in form of tables. The study found that foreign exchange rate had less positive effect on the liquidity of commercial banks while inflation rate had great positive effect. Interest rate on the other side revealed negative relationship with liquidity of commercial banks over period of study. It was concluded that each macroeconomic variable studied had influence on liquidity of commercial banks. It was also found from primary data analysis that interest rate capping in Kenya doesn’t influence liquidity ratio. The research recommended that commercial banks monitor macroeconomics variables behavior closely by developing risk monitoring and mitigation plans. Commercial banks should diversify their investment portfolios to spread the risk of macroeconomic variables. Commercial banks should further monitor and anticipate regulatory bodies interventions in financial sector and ensure they are flexible to adapt to stringent regulations by creating innovative products that improves liquidity. Regulators such as Central Bank of Kenya set up mandatory liquidity ratios that safeguard viable financial environment in Kenya. It further encouraged policy makers to balance between objectives of borrowers and providers of capital by creating enabling environment for healthy competition thereby creating robust demand and supply for capital. Finally, the study recommended that Central Bank of Kenya should set Central Bank Rate that reduces the risk to commercial banks and provide more liquidity for lending. The applicability of study results may be restricted; hence the study recommended a similar study be carried out to cover wider macroeconomic variables and wider financial sector.
CITATION: Muigei, J. K., Njeru, A., & Kirima, K. (2021). Influence of macroeconomic variables on liquidity of commercial Banks in Kenya. The Strategic Journal of Business & Change Management, 8 (2), 275 – 291.
Key Words: Interest Rate Capping, Inflation, Foreign Exchange Rate, Bank Liquidity
Full Text:
PDFReferences
Adrian, T., & Shin, H. S. (2009). Money, liquidity, and monetary policy. American Economic Review, 99(2), 600-605
Altunbas, Y., Gambacorta, L., & Marques-Ibanez, D. (2010). Does monetary policy affect bank risk-taking?.
Bouwman, C. H. (2013). Liquidity: How banks create it and how it should be regulated.
Barro, R. J. (2013). Inflation and economic growth. Annals of Economics & Finance, 14(1).
Banerjee, R. N., & Mio, H. (2018). The impact of liquidity regulation on banks. Journal of Financial intermediation, 35, 30-44.
Cetorelli, N., & Goldberg, L. S. (2012). Liquidity management of US global banks: Internal capital markets in the great recession. Journal of International Economics, 88(2), 299-311.
Cole, R. A., & White, L. J. (2012). Déjà vu all over again: The causes of US commercial bank failures this time around. Journal of Financial Services Research, 42(1-2), 5-29.
Dick-Nielsen, J., Feldhütter, P., & Lando, D. (2012). Corporate bond liquidity before and after the onset of the subprime crisis. Journal of Financial Economics, 103(3), 471-492.
Duttweiler, R. (2011). Managing liquidity in banks: a top down approach. John Wiley & Sons.
Enqvist, J., Graham, M., & Nikkinen, J. (2014). The impact of working capital management on firm profitability in different business cycles: Evidence from Finland. Research in International Business and Finance, 32, 36-49.
Galí, J. (2015). Monetary policy, inflation, and the business cycle: an introduction to the new Keynesian framework and its applications. Princeton University Press.
González, A., & Rubio, G. (2011). Portfolio choice and the effects of liquidity. SERIEs, 2(1), 53-74.
Haldane, A. (2012). A leaf being turned. A speech given by Andrew G. Haldane, Executive Director, Financial Stability and member of the Financial Policy Committee to Occupy Economics,“Socially useful banking” at Friend’s House, Euston, London on, 29.
Heathfield, D. F. (2016). An introduction to cost and production functions. Macmillan International Higher Education.
Hughes, J. R. (2017). Wicksell on the Facts: Prices and Interest Rates, 1844 to 1914. In Value, Capital and Growth (pp. 215-255). Routledge.
Ibbotson, R. G., Chen, Z., Kim, D. Y. J., & Hu, W. Y. (2013). Liquidity as an investment style. Financial Analysts Journal, 69(3), 30-44.
Kweri, S. M. (2011). The relationship between working capital management and profitability of manufacturing firms listed at the Nairobi Stock Exchange. Unpublished MBA project paper, UON.
Keynes, J. M. (2018). The General Theory of the Rate of Interest. In The General Theory of Employment, Interest, and Money (pp. 145-153). Palgrave Macmillan, Cham.
Kidwell, D. S., Blackwell, D. W., Sias, R. W., & Whidbee, D. A. (2016). Financial institutions, markets, and money. John Wiley & Sons.
McConnell, C. R., Brue, S. L., & Flynn, S. M. (2009). Economics: Principles, problems, and policies. Boston McGraw-Hill/Irwin.
Miencha, I., & Selvam, M. (2013). Operational efficiency and profitability of Kenyan commercial banks. Available at SSRN 2335851.
Morris, R. (2018). Early Warning Indicators of Corporate Failure: A critical review of previous research and further empirical evidence. Routledge.
Malmendier, U., & Nagel, S. (2015). Learning from inflation experiences. The Quarterly Journal of Economics, 131(1), 53-87.
Mbua, S. N. (2017). Effect of Interest rates capping by the Central Bank of Kenya on the Banks listed on the Nairobi Securities Exchange (Doctoral dissertation, United States International University-Africa).
Muriithi, J. G., & Waweru, K. M. (2017). Liquidity risk and financial performance of commercial banks in Kenya. International Journal of Economics and Finance, 9(3), 256-265.
Olweny, T., & Shipho, T. M. (2011). Effects of banking sectoral factors on the profitability of commercial banks in Kenya. Economics and Finance Review, 1(5), 1-30.
Owidi, B. O. (2018). Effects of Macro-Economic Variables on Mortagage Loan Uptake in Selected Financial Institutions in Nairobi City County, Kenya (Doctoral dissertation, Kenyatta University).
Power, B. (2017). Insolvency explained. Company Director, 33(8), 38.
Rajan, R. G. (2011). Fault lines: How hidden fractures still threaten the world economy. princeton University press.
Raashid, M., Rasool, S. A., & Raja, M. U. (2015). Investigation of profitability of banking sector: Empirical evidence from Pakistan. Journal of Finance, 3(1), 139-155.
Sims, C. A. (2016, August). Fiscal policy, monetary policy and central bank independence. In Kansas Citi Fed Jackson Hole Conference.
Singh, A., & Sharma, A. K. (2016). An empirical analysis of macroeconomic and bank-specific factors affecting liquidity of Indian banks. Future Business Journal, 2(1), 40-53.
Söderberg, J. (2008). Do macroeconomic variables forecast changes in liquidity? An out-of-sample study on the order-driven stock markets in Scandinavia (No. 2009: 10). Linnaeus University, Centre for Labour Market Policy Research (CAFO), School of Business and Economics.
Waweru, T. W. (2014). The effect of macroeconomic variables on the liquidity of infrastructure bonds listed at Nairobi Securities Exchange. Unpublished MBA Research Project. University of Nairobi.
Manyura, A.K. (2012). Perceived factors affecting employee retention at Kenya commercial bank limited head quarters
Cheboi, S.C. (2014). employees’ perception of the factors influencing staff promotion decisions at the cooperative bank of Kenya headquarters
Kelley, F.E. (2012) Career development practices among commercial banks in Kenya and established that there are several career developments practices that are evident among commercial banks in Kenya.
M’Amanja, D & Morrissey, O. (2005). Fiscal Policy and Economic Growth in Kenya. Centre for Research in Economic Development and International Trade. CREDIT Research Paper (No. 05/06), 3Kamandea E.G., Zablonb E., Ariemba, J. (2017). The Effect of Bank Specific Factors on Financial Performance of Commercial Banks in Kenya, International Journal of Sciences: Basic and Applied Research (IJSBAR) (2016) (V.30)
Nyambariga, M.D. (2017) Effects of exchange rates volatility on imports and exports in Kenya
Sibte, S.S. (2017) The impact of foreign exchange fluctuations on earnings from tea export in Kenya: a case of Kenya Tea Development Agency
Osano, S.A. (2016). Exchange rate volatility and financial performance of listed commercial banks in Kenya
Majok, E. (2015). Effects of exchange rate fluctuations on financial performance of commercial banks in Kenya
Amuhinda, R.A. (2018), effects of interest rate capping on performance of commercial banks in Kenya.
Imbo, C.A. (2018). Effect of interest rate capping on performance of commercial banks in Kenya
Madhi, D. (2017). The Macroeconomic Factors Impact on Liquidity Risk: The Albanian Banking System Case, EuropeanJournal of Economicsand Business Studies 3(1), 8
Rwigi, E.W. (2018). Effects of inflation on Kenya commercial banks’ lending behaviors
Karuoro, M. (2018) The relationship between interbank transaction volume and exchange rate volatility in the Kenyan Shilling against the US Dollar
DOI: http://dx.doi.org/10.61426/sjbcm.v8i2.1994
Refbacks
- There are currently no refbacks.
This work is licensed under a Creative Commons Attribution 3.0 License.
PAST ISSUES:
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.