International Journal of Management and Commerce Innovations ISSN 2348-7585 (Online) Vol. 7, Issue 2, pp: (1384-1391), Month: October 2019 - March 2020, Available at: www.researchpublish.com
IMPACT OF ASSET LIABILITY MANAGEMENT AND ECONOMIC CAPITAL MODELLING ON THE PROFITABILITY OF KENYA COMMERCIAL BANKS: A REVIEW OF EXISTING EMPIRICAL EVIDENCE 1
Edwin Ambetsa Amira, 2Dr. Willis Otuya (PhD)
1
PhD Student, Masinde Muliro University of Science and Technology, Kakamega, Kenya
2
Senior Lecturer, Masinde Muliro University of Science and Technology, Kakamega, Kenya
Abstract: The purpose of these study was to assess the mediating role of regulatory capital on the relationship between economic capital and profitability of commercial banks in Kenya. The study adopted systematic review which entailed reviewing studies on profitability, asset liability management and regulatory capital. Empirical studies between 2000 and 2019 were considered. From the findings, majority of the reviewed studies indicated that asset liability management affects profitability of commercial banks and similar results were obtained between capital regulation and profitability. The study also established that capital regulation has been successful used as moderating variable, however, the same has not been established as mediating variable between asset liability management and profitability. The study proposed a conceptual framework that would bring the mediating role of capital regulation on the relationship between asset liability management and profitability of commercial banks. Keywords: Asset Liability Management, Commercial Banks, Economic Capital Modelling, Profitability.
I. INTRODUCTION Commercial banks possess many types of assets, current or fixed, but the asset contributing to the largest share of a bank’s income is the bank loan and Echeboka et al. (2014) stressed that the quality of a bank’s assets is influenced by the bank’s exposure to specific risks, the trends in non-performing loans and the financial health of bank borrowers. The quality of loans is then crucial to the success of banks as poor asset quality is said to be one of the main causes of bank failures. Further, although banks are required to set up reserves for bad debts, banks are at high risk of incurring losses as a result of bad loans which makes non-performing loan (NPL) ratios the best proxies for asset quality. Altan et al. (2014) also assert the need for asset quality analysis is to determine the amount of non-performing assets as a percentage of the total assets. Asset quality of a commercial bank is thus mainly observed on the basis of the bank’s ability to recover its outstanding loans and advances in due time and this is shown by the percentage of bad debts to total gross loans issued (Kabir & Dey, 2014). Quality of the loan portfolio has a direct impact on bank profitability; and non-performing loans should be monitored and kept as low as possible using appropriate strategy and policies. Therefore, the lower the percentage of NPL to total loans the better the bank’s financial performance. Many studies seem to agree with this generalization (Kabir & Dey, 2014).
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