LIQUIDITY RISK, BANK SIZE AND FINANCIAL PERFORMANCE OF COMMERCIAL BANKS: EVIDENCE FROM KENYA

Abstract

This study examines the impact of liquidity risk management on the financial performance of commercial banks in Kenya, moderated by bank size. Unlike previous research that primarily relied on traditional financial metrics such as Return on Assets (ROA) and Return on Equity (ROE), this study introduces total income as a measure for financial performance and working capital as a key indicator of liquidity risk. Using data from 30 commercial banks over the period 2017–2022, descriptive and regression analyses were employed to assess this relationship. The findings reveal that liquidity risk, measured by working capital, is statistically significant in explaining financial performance, accounting for 24.8% of the variation in Total Income (R² = 0.248). The coefficient for working capital was 0.0000181 with a p-value less than 0.01, indicating a significant positive impact. Furthermore, bank size moderates this relationship, as indicated by a significant interaction effect with a p-value below 0.05 showing that larger banks absorb liquidity risk and enhance performance. This study provides a novel contribution by introducing working capital as an alternative metric for liquidity risk, highlighting the moderating role of bank size. Strengthening liquidity management is recommended to mitigate financial distress and enhance bank performance in Kenya.