International Journal of Economics, Commerce and Management United Kingdom ISSN 2348 0386 Vol. VII, Issue 11, November 2019 Licensed under Creative Common Page 260 http://ijecm.co.uk/ CENTRAL BANK OF KENYA REGULATIONS ON LIQUIDITY AND FINANCIAL PERFORMANCE OF THIRD TIER COMMERCIAL BANKS IN KENYA Judith Chemutai Lagat School of Business and Economics, University of Nairobi, Kenya [email protected]Nixon Omoro School of Business and Economics, University of Nairobi, Kenya Abstract This paper examined the influence of Central Bank of Kenya regulations on liquidity and financial performance of third tier commercial banks in Kenya. The problem that made the researcher to conduct this study is that incidents of tier three commercial banks being put into receivership, others in liquidation, mergers and acquisitions have been on the rise in recent times. The study was guided by liquidity preference theory. The study was quantitative in nature and made use of causal comparative research design. The population for this study comprised of all tier three commercial banks in Kenya (22 in number) as per August 2018. However, when collecting data only 17 were utilised as they had been in operations from 2013 to 2017. The study made use of secondary data that was collected from commercial banks annual audited results and CBK annual supervision reports. The data was subject to descriptive statistics (percentages and means) and inferential statistics (correlations and linear regression). The study found out that liquidity ratio had negatively contributed to financial performance of tier three commercial banks in Kenya. The study concluded that majority of tier three commercial banks were unable to realise the statutory liquidity ratio (20%) which negatively affected their financial performance. The study recommended that tier three commercial banks need to encourage their account holders to increase their deposits to cushion themselves against liquidity and capital adequacy risks. Keywords: Regulations, Tier III, Financial Performance, Commercial Banks
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International Journal of Economics, Commerce and Management United Kingdom ISSN 2348 0386 Vol. VII, Issue 11, November 2019
Licensed under Creative Common Page 260
http://ijecm.co.uk/
CENTRAL BANK OF KENYA REGULATIONS ON LIQUIDITY
AND FINANCIAL PERFORMANCE OF THIRD TIER
COMMERCIAL BANKS IN KENYA
Judith Chemutai Lagat
School of Business and Economics, University of Nairobi, Kenya
were below the required threshold (20%) therefore complicating their ability to meet short-term
obligations. In general, the study finds out that despite their weak influence on financial
performance of tier three commercial banks, the CBK liquidity regulations would bring stability
and sustainability in the Kenya financial sector that has experienced shocks in the last five
years. In recommendations, there is need for tier three commercial banks management to
motivate their customers to save more money with competitive interest rates at the end of the
year, this will increase their liquidity and capital to lend more money hence improved profits.
LIMITATIONS OF THE STUDY
The study was conducted among tier three commercial banks in Kenya therefore the results do
not reflect the liquidity regulations or status among Tier I and II commercial banks in the country.
Another limitation of this study is that variations occurred in terms of financial performance of
commercial banks (using ROA and ROE) where some had negative outcomes and others had
strong positive outcomes. Nevertheless, with increased regulations and monitoring, stability and
consistency in performance would be attained by these groups of banks.
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