Do income diversification and capital adequacy affect liquidity creation? A case study of commercial banks in Kenya

Dennis Muchuki Kinini, Kennedy Nyabuto Ocharo and Peter Wang’ombe Kariuki

Cogent Business & Management, 2023, vol. 10, issue 2, 2240082

Abstract: The paper investigates how income diversification and capital adequacy affect the liquidity creation of banks in Kenya. We employed unbalanced panel data from 36 commercial banks from 2001 to 2020. We extracted data from published banks’ financial reports and statements. The study used the broad and narrow measures to measure liquidity creation. Owing to the persistent nature of liquidity creation, we used a dynamic panel model and a two-step system Generalized Method of Moments (SYS GMM) in the analysis. The findings suggest a positive linkage exists between income diversification and the liquidity creation of commercial banks, implying that well-diversified banks have a high level of liquidity creation and vice versa. However, the study discovered a negative relationship between capital adequacy and liquidity creation, supporting the financial fragility-crowding out hypothesis. Consequently, the study suggests that the diversification drive in banks must be reinforced to enhance their liquidity creation. Additionally, due to the tradeoff between capital adequacy and liquidity creation, an optimal level of capital is required to provide a buffer against shocks without negatively impacting liquidity creation, a crucial channel through which banks contribute to the economy.

Date: 2023
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.1080/23311975.2023.2240082 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:oabmxx:v:10:y:2023:i:2:p:2240082

Ordering information: This journal article can be ordered from
http://cogentoa.tandfonline.com/journal/OABM20

DOI: 10.1080/23311975.2023.2240082

Access Statistics for this article

Cogent Business & Management is currently edited by Len Tiu Wright and Tahir Nisar

More articles in Cogent Business & Management from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().