SELECTED FACTORS DETERMINING THE CORPORATE CASH HOLDINGS OF COMMERCIAL BANKS IN KENYA

Abstract

The purpose of this study was to analyze selected factors determining corporate cash holdings of Commercial Banks in Kenya. The specific objectives of the study were; to assess the effect of liquid asset substitutes, net working capital, cash flow volatility, and profitability on the corporate cash holdings of the Commercial Banks in Kenya. The study was based on the following theories; Trade-off Theory, Free Cash Flow Hypothesis and the Pecking Order Theory. The study target population comprised of all the 42 Commercial Banks registered and licensed to operate in Kenya as at 31 v st

December 2018. This study took a census of the 34 Licensed Commercial Banks in Kenya which operated between the years 2009 to 2018 (a period of 10 years). The researcher collected secondary data from the audited financial reports of the sampled 34 Licensed Commercial Banks in Kenya. The secondary data was panel in nature covering the period of 10 years and was collected using data caption sheet in Appendix I. Both descriptive and inferential statistics were used to analyze the data (mean, standard deviation, maximum, and minimum) (both bivariate and multivariate regression analysis). The study found that Liquid Asset Substitutes had a substantial impact on Commercial Banks' Corporate Cash Holdings in Kenya (=-0.8098, p<0.05). Second, the study found that Net Working Capital had a significant impact on Licensed Commercial Banks' Corporate Cash Holdings in Kenya (=-0.1380496, p<0.05). Further studies revealed that Cash Flow Volatility had a substantial impact on Commercial Banks' Corporate Cash Holdings in Kenya (=-0.0755294, p<0.05). Profitability, on the other hand, had no significant impact on Commercial Banks' corporate cash holdings in Kenya (p=0.796>0.05). Finally, the study found that government taxation had no effect on the relationship between the drivers of the selected parameters and corporate cash holdings of Kenyan commercial banks. The study concluded that three of the four factors determining corporate cash holdings of Licensed Commercial Banks in Kenya, namely Liquid Asset Substitutes, Net Working Capital, and Cash Flow Volatility, had a significant effect on corporate cash holdings of Licensed Commercial Banks in Kenya, based on statistical evidence. The study therefore recommends that the Licensed Commercial Banks in Kenya should be keen on these three factors and develop managerial procedures that can prudently manage the banks Liquid Asset Substitutes, Net Working Capital and Cash Flow Volatility which will ensure efficient overall cash management.