Abstract:
Liquidity management is one of the most important duties in any company and thus it
cannot be overlooked. Sound liquidity management is integral for financial institutions
stability and profitability since deteriorating liquidity management is the most
recurrent cause of poor financial performance. In many financial institutions, the
biggest risk is lending money and not getting it back leading to liquidity problems as
most MFIs in Kenya have no access to a lender of the last resort which is the Central
Bank of Kenya. The study investigated the effect of liquidity management on the
financial performance of MFI's in Kenya. Secondary data on the study variables were
deduced from the audited financial statements of the MFIs under consideration. The
data was obtained from the CBK website, CBK’s Annual Supervision reports and also
the AMFI annual reports for 5 years from 2012-2016. The desired population of the
research consisted of all the twenty-six MFIs in Kenya that were members of AMFI
and available at the CBK website. Primary data was collected using questionnaires
whereas the secondary data involved analysis of the audited financial statements. The
study used both descriptive and inferential statistics to evaluate the data. In descriptive
analysis mean, and standard deviation of the responses was analyzed whereas, under
inferential statistics, Pearson correlation, panel power correlation and regression
analysis were adopted. The analysed data indicated that liquidity management
practices fundamentally influenced the financial performance of MFIs in Kenya. The
asset quality and maturity gap had a negative but insignificant effect on financial
performance whereas capital adequacy had a positive and significant effect on the
financial performance of MFIs. The study proposes that MFIs should strive to manage
their loan portfolio to reduce delinquent loans as they reduce the MFIs profits, bank
advances to customers should also be managed not to exceed customer deposits to
reduce the liquidity gap. Management should develop strategies for liquidity
management in MFIs. Similarly, capital adequacy enabled the MFIs to absorb shocks
that may occur within the financial markets and should be managed to prevent MFIs
from financial instability to improve financial performance.
