RELATIONSHIP BETWEEN LIQUIDITY AND OPERATIONAL EFFICIENCY OF COMMERCIAL BANKS IN KENYA

Abstract

The main aim of financial institutions is to operate efficiently in a bid to maintain stability and sustainable growth. Critical drivers to the performance and operational efficiency are external and internal economic environments. The aim of this study was to determine the relationship between liquidity and operational efficiency of commercial banks in Kenya for the five-year period 2018 - 2022. Specifically, the study sought to assess the relationship between Market Liquidity and operational efficiency of commercial banks in Kenya, establish the relationship between Funding Liquidity and operational efficiency and determine the relationship between Episodic Liquidity and operational efficiency of commercial banks in Kenya. The choice of the study five-year period was based on the availability of complete data over the study period and explosive growth of the banking sector in the country. This study adopted a descriptive research design with the study population comprising all the 42 operating commercial banks in the country. A sample of 38 banks was obtained and secondary data collected from banks annual reports for the analysis. Data was analyzed using descriptive, inferential statistics and regression analysis using SPSS (V23). Regression results indicated that the predictor variables explored in the analysis explained 46.1% of variation in operational efficiency of the commercial banks. The model was statistically significant with each of the explanatory variables, ROA, current ratio and price to earnings ratio exhibiting a positive relationship with the dependent variable. This study thus recommends financial institutions to adopt strategic measures to facilitate favourable liquidity for the commercial banks and thereby enhance their operational efficiency. Further, commercial banks should equally strive to have a large asset base in a bid to improve and record better performance in terms of profitability hence have a higher operational efficiency. Regulatory authorities should equally ensure sustainable climate for commercial banks by regulating the properly different macro-economic indicators.