ASSET-LIABILITY MANAGEMENT AND FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA

Abstract

Therefore, their profitability and stability is crucial which is achieved through proper asset-liability management. The primary goal of asset-liability management is to produce a high quality, stable, large and growing flow of net interest income to banks. This goal is accomplished by achieving the Optimum combination of assets, liabilities and financial risk. This study sought to determine the effect of asset-liability management on financial performance of Commercial Banks in Kenya. The specific objectives of the study were to; determine the effect of; asset quality, liquidity risk management, capital adequacy, and credit risk management on financial performance of Commercial Banks in Kenya and to establish the moderating effect on bank size on the relationship between asset-liability management and financial performance of Commercial Banks in Kenya. The study was anchored on four theories namely; Asset-liability Management theory, Portfolio theory, Shiftability theory of liquidity management and the concentration stability and fragility theory. Asset-liability management theory was the main theory anchoring the study. Positivism paradigm formed the philosophical underpinning for the study. The study adopted an explanatory research design involving panel data of 32 Commercial Banks in Kenya for the period 2010-2019. Panel data collected from audited financial reports of the commercial banks was analyzed by use of descriptive and inferential statistics using Eviews and presented using tables and figures. The study found out that: Asset quality had a significant negative relationship with ROE (r=-0.490, p=0.000) and ROA (r=- 0.481, p=0.000); Liquidity risk management had insignificant relationship with ROE; Capital adequacy had an insignificant effect on ROE and ROA and Credit management also had a significant but a negative effect on ROE (r=-0.464, p=0.000) and ROA (r=- 0.520, p=0.000). The findings show that only asset quality management and credit management have important performance implications for the banking industry in Kenya based on data analyzed. The R-square results indicate that the two components of assetliquidity management explain 17.2% change in ROE of commercial banks in Kenya. the negative relationship between the components and bank performance need further investigation. The recommendations from the study are; one, focus on balancing portfolio that consider risks and stability, two, optimize investments and lending practice, three, invest in a robust credit risk assessment process while balancing risk taking with responsible lending. Finally, larger banks should focus on refining their credit risk strategies to ensure they remain effective even at their scale. The impact of these factors can vary with the size of the bank, necessitating tailored strategies for different scales of operation. Regular evaluation and adjustment of these strategies in response to market dynamics are essential for long-term profitability and sustainable growth.