The Relationship between Liquidity Risk and Failure of Commercial Banks in Kenya

Abstract

Lending has been, and still is, the mainstay of banks’ business, and this is more true to emerging economies like Kenya where capital markets are not yet well developed. To most of the transition economies, however, and Kenya in particular, lending activities have been controversial and a difficult matter. This is because business firms on one hand are complaining about lack of credits and the excessively high standards set by banks, while lending commercial banks on the other hand have suffered large losses on bad loans. The purpose of the study is to determine the relationship between loan portfolio and financial performance of commercial banks in Kenya. From the findings, the study concludes that there exists a relationship between loan portfolio and financial performance of commercial banks in Kenya as loan portfolios are the major asset of banks and other lending institutions. The study also concludes that every bank should strive to have the best loans mix as it was found that some types of loans (mortgage loans, business loans, government loans) have greater effects on financial performance of commercial banks. Therefore commercial banks should have a large percentage of mortgage loans, business loans and government loans compared to personal loans and educational loans to have the best loan portfolio mix for greater financial performance.