Strathmore University SU+ @ Strathmore University Library Electronic Theses and Dissertations 2019 Effect of treasury management on the financial performance of Commercial Banks in Kenya Teresia W. Gatimu Strathmore Business School (SBS) Strathmore University Follow this and additional works at https://su-plus.strathmore.edu/handle/11071/6576 Recommended Citation Gatimu, T. W. (2019). Effect of treasury management on the financial performance of Commercial Banks in Kenya (Thesis, Strathmore University). Retrieved from http://su- plus.strathmore.edu/handle/11071/6576 This Thesis - Open Access is brought to you for free and open access by DSpace @Strathmore University. It has been accepted for inclusion in Electronic Theses and Dissertations by an authorized administrator of DSpace @Strathmore University. For more information, please contact librarian@strathmore.edu EFFECT OF TREASURY MANAGEMENT ON THE FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA GATIMU TERESIA WANGUI 066770 A RESEARCH THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF COMMERCE AT STRATHMORE UNIVERSITY STRATHMORE BUSINESS SCHOOL STRATHMORE UNIVERSITY, NAIROBI, KENYA JUNE, 2019 DECLARATION I declare that this work has not been previously submitted and approved for the award of a degree by this or any other University. To the best of my knowledge and belief, the thesis contains no material previously published or written by another person except where due reference is made in the thesis itself. © No part of this thesis may be reproduced without the permission of the author and Strathmore University. Teresia Wangui Gatimu ............................................... 3RD June 2019 APPROVAL The thesis of Teresia Wangui Gatimu was reviewed and approved for examination by the following: Dr. Freshia Mugo – Waweru, Senior Lecturer, Strathmore University Business School Strathmore University Dr. George Njenga, Dean, Strathmore University Business School, Strathmore University Professor Ruth Kiraka, Dean, School of Graduate Studies, Strathmore University iii ACKNOWLEDGMENT I thank the Almighty God for the big milestone in completing this study. To Daniel, Elizabeth and Olivia thank you for your patience. I acknowledge the immense role played by my Supervisor, Dr. Freshia Mugo-Waweru. Her guidance throughout the research was immense. I also acknowledge the pivotal role played by the School of Management and Commerce and postgraduate school staff. Friends and all other people not mentioned herein but contributed directly or indirectly to making this work a reality I will always be indebted for the support they accorded me throughout the journey. iv TABLE OF CONTENTS DECLARATION............................................................................................................................ i ACKNOWLEDGMENT ............................................................................................................. iii LIST OF TABLES ...................................................................................................................... vii LIST OF FIGURES ................................................................................................................... viii LIST OF ABBREVIATIONS ..................................................................................................... ix ABSTRACT ................................................................................................................................... x CHAPTER ONE: INTRODUCTION ......................................................................................... 1 1.1 Background of the Study .................................................................................................. 1 1.2 Research Problem ............................................................................................................. 6 1.3 Research Objectives .............................................................................................................. 7 1.3.1 General Objective ........................................................................................................... 7 1.3.2 Specific Objectives ......................................................................................................... 7 1.4 Research Questions .......................................................................................................... 8 1.5 Scope of the Study............................................................................................................ 8 1.6 Significance of the Study ...................................................................................................... 8 1.6.1 Bank Management and Industry Practitioners ................................................................ 8 1.6.2 Regulators and Policy Formulators ................................................................................ 9 1.6.3 Researchers and Academicians ...................................................................................... 9 CHAPTER TWO: LITERATURE REVIEW .......................................................................... 10 2.1 Introduction ......................................................................................................................... 10 2.2 Theoretical Review ............................................................................................................. 10 2.2.1 Risk Management Theory ............................................................................................ 10 2.2.2 Liquidity Preference Theory ......................................................................................... 12 2.3 Empirical Literature ............................................................................................................ 13 2.3.1 Funding Strategies and Financial Performance of Commercial Banks ........................ 13 2.3.2 Investment Strategies and Financial Performance of Commercial Banks ................... 15 2.3.3 Liquidity Management and Financial Performance of Commercial Banks ................. 16 2.3.4 Financial Risk Management and Financial Performance of Commercial Banks ......... 17 2.3.5 Banks Size, Treasury Management Practices and Financial Performance ................... 19 2.4 Summary of Literature Review and Research Gaps ........................................................... 21 2.5 Conceptual Framework ....................................................................................................... 22 v CHAPTER THREE: RESEARCH METHODOLOGY ......................................................... 25 3.1 Introduction ......................................................................................................................... 25 3.2 Research Philosophy ........................................................................................................... 25 3.3 Research Design .................................................................................................................. 25 3.4 Target Population ................................................................................................................ 26 3.5 Sampling.............................................................................................................................. 26 3.6 Data Collection Procedures ................................................................................................. 27 3.7 Data Analysis and Presentation ........................................................................................... 28 3.7.1 Analytical Model .......................................................................................................... 29 3.7.2 Diagnostic Tests ........................................................................................................... 33 3.8 Research Quality ................................................................................................................. 33 3.8.2: Reliability of Data Collection Instruments .................................................................. 33 3.8.2 Validity of Data Collection Instruments ....................................................................... 34 3.9 Ethical Issues in Research ................................................................................................... 34 CHAPTER FOUR: PRESENTATION OF RESEARCH FINDINGS .................................. 36 4.1 Introduction ......................................................................................................................... 36 4.2 Secondary Data Analysis .................................................................................................... 36 4.2.1 Step Wise Regression ................................................................................................... 36 4.2.2 Descriptive Statistics .................................................................................................... 38 4.2.3 Hausman Test ................................................................ Error! Bookmark not defined. 4.2.4 Effect of Treasury Management and Financial Performance of All Commercial Banks ............................................................................................................................................... 40 4.2.5 Effect of Treasury Management and Financial Performance of Small-Sized Commercial Banks ..................................................................................................................................... 41 4.2.6 Effect of Treasury Management and Financial Performance of Medium Commercial Banks ..................................................................................................................................... 43 4.2.7 Effect of Treasury Management and Financial Performance of Large Commercial Banks ............................................................................................................................................... 45 4.3 Primary Data Analysis ........................................................................................................ 46 4.3.1 Demographic Characteristics of the Respondents ........................................................ 46 4.3.2 Treasury Management Practices Adopted by Commercial Banks ............................... 47 4.3.2.1 Funding Strategies adopted by Commercial Banks ................................................... 48 vi 4.3.2.2 Investment Strategies adopted by Commercial Banks .............................................. 49 4.3.2.3 Liquidity Strategies adopted by Commercial Banks ................................................. 50 4.3.2.4 Risk Management Strategies adopted by Commercial Banks ................................... 51 4.3.2.5 Treasury Management Practices and Financial Performance .................................... 52 4.3.3 Diagnostic Tests ........................................................................................................... 53 4.3.3.1 Test for Multicollinearity ........................................................................................... 54 4.3.3.2 Descriptive Statistics and Test for Normality ........................................................... 54 4.3.4 Perceived Correlation of Treasury Management on Financial Performance of Commercial Banks ................................................................................................................ 56 CHAPTER FIVE: SUMMARY, DISCUSSION, CONCLUSION AND RECOMMENDATIONS ............................................................................................................ 58 5.1 Introduction ......................................................................................................................... 58 5.2 Summary and Discussion of the Findings ........................................................................... 58 5.2.1 Treasury Management Practices Used by Commercial Banks in Kenya ..................... 58 5.2.2 Effect of Treasury Management Practices on the Financial Performance of Commercial Banks in Kenya ...................................................................................................................... 59 5.2.3 Perceived Effect of Treasury Management on Financial Performance of Commercial Banks in Kenya ...................................................................................................................... 61 5.3 Conclusion ........................................................................................................................... 63 5.4 Recommendations ............................................................................................................... 64 5.4.1 Recommendation for Policy ......................................................................................... 64 5.4.2 Recommendation for Practice ...................................................................................... 64 5.5 Limitations to the Study ...................................................................................................... 65 5.6 Areas for Further Research ................................................................................................. 66 REFERENCES ............................................................................................................................ 67 APPENDICES ............................................................................................................................. 75 Appendix I: Letter of Introduction ............................................................................................ 75 Appendix II: Questionnaire ....................................................................................................... 76 Appendix III: List of commercial banks in Kenya .................................................................... 81 Appendix IV: Reliability Analysis ............................................................................................ 83 Appendix V: Tests and Descriptive Statistics ........................................................................... 85 Appendix VI: Granular Panel Data Analysis Results ............................................................... 87 Appendix VI: Factor Analysis................................................................................................... 93 vii LIST OF TABLES viii LIST OF FIGURES Figure 2. 1 Conceptual Framework .............................................................................................. 23 ix LIST OF ABBREVIATIONS CBK : Central Bank of Kenya DTMFIs : Deposit Taking Micro Finance Institutions NIM : Net Interest Margin ROA : Return on Assets ROE : Return on Equity SACCOs : Savings and Credit Co-Operative Society x ABSTRACT Treasury management importance cannot be underestimated particularly for sustained financial performance of commercial banks. The study was guided by risk management theory and liquidity preference theory. 43 licensed commercial banks in Kenya were studied to achieve the study objectives. Data was obtained from secondary data sources and primary data sources using a questionnaire. The findings were that four main treasury management practices were adopted by the commercial banks and included funding strategies, investment strategies, liquidity management and risk management. The treasury management practices studied were perceived to explain 67.6% of the financial performance of the studied commercial banks in Kenya. The number of significant treasury management practices reduced with increase in bank size. The study concluded that funding strategies, investment strategies, liquidity management and risk management strategies were the main determinants of financial performance among commercial bank. However, evaluation of the size of the commercial banks was concluded to be paramount during the formulation and integration of the treasury management decisions. The study recommended that treasury management practices should be a target mainly for small and medium commercial banks that seek to increase their financial performance. Additionally, the researcher recommended that the management of the banks should institute appropriate internal mechanisms to put mechanisms of having periodic and regular review of the treasury practices in line with their bank size. The study ensured originality in defining the research and adopted content where all sources were fully recognized. The study limitations included data collection confidentiality concerns and extracting of data from the financial statements due to varying reporting by commercial banks. 1 CHAPTER ONE: INTRODUCTION 1.1 Background of the Study Incidents of financial management crisis globally and uncertainty in business environments has proven that proper treasury management practices are essential for sustained financial performance (Olamide, Uwalomwa, & Ranti, 2015; Ravenhill, 2017). Particularly in the banking sector, poor treasury management brings about undesirable outcomes and ultimately institution bankruptcy causing financial crisis (Mwangi & Muturi, 2016). This has resulted in the importance of treasury management practices being heightened which aid in anticipation, control, and prevention of potentially costly risks. However, despite the existence of various treasury management practices, banks both in the developed and emerging economies have continued to underperform and struggle to remain profitable (Basel, 2017). The collapse of Royal British bank and City of Glasgow bank in the 18th century and Barings bank in the 19th century as a result of poor treasury management attests to this apprehension (Grossman, 2010; Onwonga, 2016). In Kenya, the recent collapse of some of the commercial banks also confirms that successful utilization of treasury management practices in promoting financial performance is yet to be realized (Kinyua, 2014). Banks such as Chase Bank, Imperial Bank and Dubai Bank were put under receivership between 2010 and 2016 indicating lack of effective treasury management measures in the banks (Central Bank of Kenya, 2016; Mutuku, 2016). This leads to increased concern on the exact state of treasury management practices and effects brought on financial performance of commercial banks. The volatile nature of market environments in which organizations operate in poses increased uncertainties that threaten the performance of firms (Picciotto & Mayne, 2016). Specifically, after the global financial crisis in 2008, most organizations continue to experience challenges in 2 remaining profitable (Nyasimi & Gitau, 2016). Monitoring and responding to changes in the environment is of great importance now more than ever. This has seen increased recognition in the importance of treasury management in organizations so as to mitigate these uncertainties, prevent insolvency and illiquidity as well as improve the organizations performance (Okere, Isaka, & Ogunlowore, 2018). Historically treasury management centered on working capital management which was critical to the financial well-being of every organization. As a result of corporate re-engineering and the dynamic way in which organizations use information and technology, treasury management has become broader in its scope of responsibilities (Phillips, 1997). Treasury management is about cash management, short term financial investments and management of risk relating to short term investments and liquidity (Schmid, 2010). Commercial banks main revenue comes from treasury management and cash concentration disbursement services (White & Tyler, 2016). In the banking sector, treasury management has become significantly more complex due to uncertainty and risks (Said & Tumin, 2011). The ability of commercial banks to achieve financial performance depends on how treasury management is conducted to maximize returns on cash and investments versus the cost of financing (White & Tyler, 2016). Treasury management at commercial banks vary with non-financial institutions since commercial banks will need to source for cheapest funds from the market, investing them in higher returns but low risk investments and be able to meet cash requirements of customers which happen are unpredictable (Ogunpola, 2014). Hamid (2011) viewed treasury management as the complex approach of maximizing financial performance through optimal use of resources held by commercial bank. Financial performance of commercial banks is vital since they contribute in a big way to economic development and growth by facilitating flow of resources from areas of surplus to deficit segments (Ongore, 2013). 3 According to White and Tyler (2016), the main investment instruments used by banks include commercial papers, repurchase agreements (repos), tri-party repos, bonds, short term money market deposits, customer advances and floating rate notes. These instruments have different implications on a commercial bank’s cash position and financial performance (Uche, 2014). To attain effective treasury management in organizations, financial risk management has proven to be beneficial in identification, assessment and monitoring of potential risks to the organization (Schmid, 2010). The efficiency of risk management in an organization is accessed by the ability of the organization to prevent risks from occurring, proper control of risks if they occur and ensuring return to normalcy of an organization’s operations after the risks (Olamide, Uwalomwa, & Ranti, 2015). The importance of financial risk management is ensuring the continuous maximization of shareholders’ capital and resumption to normalcy of operations even in the event that unforeseeable risks occur (Graham & Bordeleau, 2010). Successful financial risk management has been found by various scholars to be effective in avoiding and minimizing costly risks and improving organizational performance. Specifically, Collier, (2004) and Wanjohi, (2013) found that proper financial risk management had the ability of improving financial performance of organizations and improved returns in the banking sector respectively. Felix and Claundine, (2008) and Al-Khouri, (2011) also established in their respective studies that proper management of risk including liquidity, capital and credit positively influenced bank’s profitability and overall performance. This proposes that for an organization to be financially secure and stable, financial risk management needs to be efficient and effective. Moreover, Gaitho, (2010) reviewing risk management involving saving, credit and cooperative organizations in Nairobi and revealed that financial risk management had impacted undoubtedly on their agencies and aided in achieving financial objectives, regulatory and customer 4 requirements. This relates with Omar, (2016) who established that poor financial performance and low margins emanated from poor risk management coupled with competition increase in the market. A study by Mbuguah, (2013) also indicated that fraud related challenges among profit making financial institutions in Kenya could be mitigated through proper management of treasury related risks hence showing the role of financial risk management as a treasury management tool in commercial banks. Liquidity management has been established to positively impact the financial performance of commercial banks. The findings by Dang (2011) support this by indicating that optimal liquidity levels impacted on financial performance positively. Nyabwanga, (2011) also found that working capital management directly affected the financial performance, cash level, competitiveness, growth, working capital and quality of the assets held by commercial bank. The importance of liquidity notwithstanding, some studies have not found empirical support on the role of liquidity. An example is Said and Tumin (2011) whose study was based in Malaysia and China found no significant relationship between financial performance and liquidity position of commercial banks; regions and market segments notwithstanding. Regionally, Ugraise, (2013) assessed cash status of commercial banks and financial performance among Rwanda’s commercial banks and established that cash level management was important in enhancing commercial banks performance. This re-counts a study conducted by Attom, (2013) who found that liquidity management and short term investments played a huge and significant role in the sustainable growth as well as the rate of survival of Ghana’s commercial banks. Mukti, (2013) used a panel regression approach on all the profit making private banks Kenya and found significant positive effect on liquidity management and financial performance. The findings are 5 also consistent with Sang, (2014) who focused on banks in Nakuru and also found similar positive effect. Bank financial performance is mainly attained using financial ratios which include Net Interest Margin (NIM), return on assets (ROA) and return on equity (ROE). ROE measure shows the financial performance level compared to amount invested by shareholders. ROA indicates the financial performance of a bank and is the percent of income the assets held by the bank at any time (Khrawish, 2011). NIM on the other hand asses the interest income against interest expense incurred to fund the funds being invested or advanced as loans by the commercial banks (Gul et al., 2011). Treasury management practices vary with size of the commercial bank and so is the financial performance of commercial banks (Khrawish, 2011). For treasury management to be effective the practices in place need to be aligned with the commercial bank’s size, financial strategy, flexibility and limits for each financial risk (Uche, 2014). In this regard, well managed treasury management practices should have well set out procedures which should be updated regularly and be aligned to the size of the organization. Treasury management policies act as the channel through which board of the commercial banks and management delegate financial decisions (White & Tyler, 2016). Therefore, standard treasury management practices help to ensure adequate controls are in place by the banks and that there are adequate checks and balances and thus enable the bank to maximize financial performance (Graham & Bordeleau, 2010). General objective of treasury department of any commercial bank is to maximize financial performance of the firm but optimal use of the resources and management of the inherent risk facing treasury decisions (Rop, 2016). Though, the treasury function is core to financial performance of commercial banks, empirical evidence and studies on the treasury management 6 have not been fully conclusive on the exact effect on financial performance. There have been contradicting findings from the studies done on components of treasury management. This study focused on how treasury management impacts on a bank’s financial performance. 1.2 Research Problem Central Banks across the world regulate the treasury management practices to be adopted. However, despite the strict regulations, commercial banks continue to collapse due to inappropriate treasury management practices adopted. Empirically, studies conducted have not been fully conclusive on the exact effect of treasury practices and the main objective of commercial banks: financial performance. In Nigeria, Ironkwe and Muenee (2016) found a positive correlation relationship between treasury management and bank performance. Okere, Isaka, and Ogunlowore, (2018) found that financial performance was positively impacted by optimal liquidity management. This coincides with Libor and Ngahu, (2015) who also found a strong and positive effect between treasury management and financial performance profit making commercial banks in Kenya. Also, Kathomi, Kimani, and Kariuki, (2017) established that properly implemented treasury management measures positively impacted the sustainability of financial institutions. However, Ilhomovich, (2009) established that the effect of treasury management is not always clear since treasury decisions involved risk and financial tradeoff as a result of treasury decisions undertaken. On the contrary, Shuremo, (2016) established that implementation of treasury management practices was negatively related to the commercial banks financial performance. While Txomin, (2011) found out that treasury management did not necessarily target to improve financial performance but to maintain commercial banks financial soundness, liquidity, prevention of bank panic and consequently bank collapse. Therefore, due to the contradicting findings, there 7 is increased need for identification of the common treasury practices in different areas of treasury management for ease of benchmarking (Phillips, 1997). Thus, the effect of treasury management on financial performance of commercial banks in Kenya remains unclear. Understanding the influence of treasury management is essential for providing a guide in improving the performance of the banking sector in Kenya which has been under threat from vast regulations including interest rate regulations and the probable increase of the core capital from one billion to five billion, posing threat to their profitability. The study aimed at addressing this by answering the research question; what is the effect of treasury management on the financial performance of commercial banks in Kenya? 1.3 Research Objectives 1.3.1 General Objective To determine the effect of treasury management on the financial performance of commercial banks in Kenya. 1.3.2 Specific Objectives The study was guided by the following specific objectives; 1. To determine the treasury management practices adopted by commercial banks in Kenya. 2. To determine the moderating effect of size on the relationship between treasury management practices and financial performance of commercial banks in Kenya. 3. To examine the perceived effect of treasury management on financial performance of commercial banks in Kenya. 8 1.4 Research Questions The study aimed at addressing the following research questions; 1. Which treasury management practices are adopted by commercial banks in Kenya? 2. What is the moderating effect bank size on the relationship between treasury management practices and the financial performance of commercial banks in Kenya? 3. How does commercial banks management perceive the effect of treasury management on financial performance of commercial banks in Kenya? 1.5 Scope of the Study The study sought to analyze the effect of treasury management on the financial performance of commercial banks in Kenya. The independent variables were treasury management practices and the dependent variable was the financial performance of commercial banks. Target population was commercial banks in Kenya totaling to 43. Secondary data for the study was collected for a five- year period 2013 to 2017 on an annual basis. Primary data was collected using questionnaires in year 2019 from all the 43 commercial banks. 1.6 Significance of the Study The study is considered important to various players who include the bank management and commercial banks practitioners, regulatory bodies and policy formulators and researchers. 1.6.1 Bank Management and Industry Practitioners The findings of the study will be vital to financial institutions managers and industrial practitioners. Based on the recommendations made at the end of the study, they may be able to improve the effectiveness in the use or implementation of treasury management practices and may use it to gain a competitive edge against their rivals. This will ensure that organizational goals are achieved 9 while assuring financial security and sustainability of the commercial banks. Other managers in other sectors may also benefit regarding the same therefore promoting economic wellbeing of the people, economic development and growth in the country. The study has recommended that bank managers to formulate treasury management practices that are in line with the bank size and this will drive the financial performance of the commercial banks. 1.6.2 Regulators and Policy Formulators The findings of the study will also be of importance to the regulatory bodies and policy formulators in the country. It will shed light on whether the performance of the banks may be enhanced through proper treasury management practices. It may act as a guide in formulation of a benchmark of conducive practices to favour standard treasury management capable of improving commercial banks financial performance. This is important since this sector contributes significantly to the country’s economy. Further, the study recommended that regulators will need to do more and ensure that treasury management practices are in line with the bank size. Further, cases of noncompliance was noted which should be addressed by the policy formulators. 1.6.3 Researchers and Academicians Researchers, students, and other academicians will find value in this study for information. Thus, future studies can be based on the present study especially by taking advantage of the highlighted challenges and shortcomings of the present study and the recommended future research directions. The study has added to body of scholarly knowledge and further helps academicians’ society who want to study in detail the treasury management and commercial financial institutions financial performance. The study recommended for further study on other financial institutions like deposit taking micro finance institutions. Further study was also recommended where other treasury management practices will be studied. 10 CHAPTER TWO: LITERATURE REVIEW 2.1 Introduction The chapter reviews the theoretical foundations on treasury management and financial performance of commercial banks. Specifically, the chapter contains theoretical review focusing on their proposition and implication to the study and empirical review with emphasis to the methodology and findings. It also describes the conceptual framework and summary of literature review with an over view of the research gaps to be addressed by the study. It formed a basis on which the entire study was conducted. 2.2 Theoretical Review Theories were considered as important anchor guide for the study. They enabled the study to define the study problem from a theoretical ground. Thus, the study was founded on Risk Management Theory and Liquidity Preference Theory. These theories provided the theoretical underpinnings of the study on transmission mechanism of treasury management on financial performance. These enabled prediction of the relationship between the study independent and dependent variables and thus definition of the hypothesis. The theories presented herein are discussed in terms of the assumptions, proposition, and criticisms that have been brought about by the theories over the years. 2.2.1 Risk Management Theory Risk Management Theory was introduced and advanced by David, (1997). Risk Management Theory provides a framework through which risk may be identified, assessed, prioritized followed by coordination measures for minimizing, monitoring and control of the effects of the risks (David, 1997). The theory holds that each organization is prone to be faced with various risk arising from 11 both the internal and external factors. These risks include credit risk, legal liabilities, project failures, uncertainties in the financial markets, deliberate attack from an adversary, disasters as well as or events of uncertain or unpredictable root-cause (Weng, 2005). According to the Risk Management Theory, these unforeseeable risks despite not being accounted for may result in adverse effects on the performance and overall success of the firm when not well managed (Eichhorn, 2004). Risk Management Theory describes the process of coming up with strategies for identifying and managing potential and imminent risks that may affect the organization (Tseng, 2007). Risk management attempts to assess uncertainties, prioritise them and prescribe the best course of action to deal with any uncertainty, especially where information on the risk taking behaviour of the decision maker is present (Grable, 2000). This ensures management is constantly aware and informed about risks that could occur through constant monitoring of its exposure and being strategically positioned and flexible to respond to change. These risks either directly or indirectly influence firms based on the specific organization or risk (Eichhorn, 2004). The relevance of Risk Management Theory in explaining risk management strategies in organizations is supported empirically by studies conducted such as Wu and Olson, (2010) and Ngugi, (2001) in enabling organizations to anticipate and manage risks thus minimizing losses. On the contrary, Linbo, (2004) argues that the main limitation of the theory is that it creates ambiguity as it does not distinguish the exact risk management practices to be employed by organizations. The relevance of the theory to the study is in describing that all organizations are prone to experience risks irrespective of the industry or nature of operations, with the commercial banks in Kenya being of no exception. These risks if not well managed through appropriate risk 12 management strategies are theorized to cause reduction in returns and shareholder capital in the commercial banks. Therefore, according to this theory, management of different risks through well formulated and implemented treasury management practices are expected for commercial banks to remain profitable. Commercial banks are theorized to make decisions on which risks to reduce and which ones to increase and how, based on the rate of attainment of comparative advantage. 2.2.2 Liquidity Preference Theory Thus theory was first introduced by Keynes in 1936 and later developed to respond to various disciplines in different fields. The theory holds that three main motives have been put across as to why people may demand and prefer liquidity. These include; the speculative motive which is the company’s ability to utilize special opportunities which may bring benefits to the firm, the transaction motive in which people hold cash to be utilized for daily transactions and precautionary motive whereby cash is held for unexpected events (Bibow, 2013; Carvalho, 2015). According to this theory, liquidity management in organizations are motivated by any or all of the three reasons why people prefer cash money. In application liquidity preference theory describes two types of premiums at spot rate and forward rate. In essence, these rates are used by commercial banks to compensate for the scarce liquid resources (Beck & Hesse, 2006). Demand for money is the main driving force for liquidity in the banking industry (Vossen, & Ness, 2010). However, the theory is not comprehensive enough in describing the impact that liquidity management may have on how the banks perform. The proposition of the theory thus is that commercial banks in Kenya have varying liquidity levels depending on the current demand for money by their customers. The importance of the theory is that it describes the motives behind which organizations and individuals may opt to hold cash. Therefore, through proper liquidity management, the commercial banks would be able to attain a 13 balance in their liquidity levels and hence remain profitable. According to this theory, proper liquidity management practices are essential in enhancing the growth and productivity of the financial aspects of commercial banks. 2.3 Empirical Literature Empirical review has been done in respect to study objectives and covers treasury management. 2.3.1 Funding Strategies and Financial Performance of Commercial Banks Treasury management involves determination of optimal funding sources. Normally, the board in a commercial bank offers the greater blueprint to be followed relating to debt, liquidity, risk and treasury at large. On daily basis, the treasury decisions deals with the specific decisions relating to customers, cash, funding and risks. The objective is to ensure cheapest funding of treasury activities and thus maximizing returns (Rooyen, 2002). Funding strategies involve trade-off between risk of funding, like customers calling their deposits at any moment and ensuring funds are invested at optimal return levels. Equity funding is considered the cheapest source of funding although it’s not a very flexible or regular funding. Debt is considered risky since it inreases leverage level and increase interest expense (Ahlin, & Townsend, 2007) and may affect a firm’s financial performance. Commercial banks mainly rely on debt funding from deposits which are mainly short term. Demirgüç-Kunt and Huizinga (2009) found that bank funding techniques impacted on risk and returns. The study also found that commercial banks attracted only short term funding sources like short term borrowing accounted a small source of funds for commercial banks with major short term funding being funded by deposits. Further findings were that deposit and non-deposit funding had higher risk including being a source of potential liquidity crisis. This was supported by Huang 14 and Ratnovski, (2008) criticised funding bank through deposits since customers could withdraw the funding based on rumours, unfounded panic and speculation causing the bank to be insolvent, fail to meet the financial obligations of ensuring customers have their money and thus bank fail. Another study done by Mahjabeen, (2010) empirically examined influence of funding on financial stability in Europe. The study organizations performances in Japan and United States. The study found that financial institutions with better funding methods were likely and continued to be more sustainable. However, the study was not conclusive in describing the nature of such funding strategies which would render a firm financially sustainable, operationally and financially. Similarly; Kiiru, (2013) investigated Deposit Taking Micro Finance institutions in Kenya funding structure and how this affected financial performance in period 2011 to 2012. The results revealed positive significant relationship between funding structure and financial performance. Increase in customer deposits and assets in DTMFIs would significantly improve financial performance of DTMFI while borrowing significantly decreased DTMFIs financial performance. The study was however limited only one segment of financial institutions which may not be comparable to commercial banks. While Ondieki et al, (2013) examined external financing strategies and how the strategies influenced financial performance of SACCOs in Kisii Central District using a sample size of 100 respondents. The study found that SACCOs were receiving external funding which influenced the financial of the institutions. The effect was dependent on portfolio quality, investment policies and policies on financing mix. The current study will aim at ascertaining whether the same influence exists among the commercial banks. 15 2.3.2 Investment Strategies and Financial Performance of Commercial Banks Treasury management objective mainly is to invest bank financial assets in short term investments capable of maximizing financial returns (Dang, 2011). The theoretical rationale for investing in alternative assets develop a mix of investment portfolio which diversifies the risks, ensure stable returns and thus translating in improved financial performance (Bhattacharyya, 2011). A study done by Gachoki, (2013) on the investment strategies used by private equity fund investors in Kenya found that 45% of the companies adopted venture capital as a strategy, 33% adopted leveraged buyouts and 22% adopted mezzanine financing as an investment strategy. The study concluded investment styles had effect on the performance of private equity fund investing in Kenya. However, the conclusions may not be fully applied to the commercial banks as the study focused only on the private equity funds. Likewise; Osano, (2013) also obtained the same positive effect brought about by adopted investment approaches and financial performance of firms in investment in Kenya. The population of study was all investment funds in Kenya and nineteen investment funds as given by Capital Market Authority Cap. 485A as of 2013. From inferential statistics, a positive relationship was established between ROA and the Predictor variables which are investment strategy, Leverage, Liquidity, age and size. This implied that to improve financial performance, investment literacy and capability programs needed to be incorporated in the investment sector’s innovation strategies. Azzi and Suchard, (2013) on the other hand examined the investing behavior of investors in China. The results of the study showed that investment decisions was mainly affected by the attitudes portrayed by investors both domestic and foreign investors in China. The study however was not able to be specific on the exact effects brought about by these investors' behaviors on the financial performance of organizations. 16 On the contrary; Kogie, (2003) in a study on investment decisions of the future of collective investment schemes in Kenya found that investment among the firms had experienced slow growth having insignificant effect on financial performance. The study also the reduced financial performance as result of investment strategies was contributed to by low public awareness and education of investors, lack of public trust and low returns indicating that most organizations still lacked well set out investment strategies. 2.3.3 Liquidity Management and Financial Performance of Commercial Banks Liquidity management involves retaining cash position that is adequate to meet short term cash needs and that maximizes investment of excess cash to maximize financial returns. Bank liquidity refers to a bank’s ability to cater for both short term and long term financial obligations (Alamayehu, & Ndung’u, 2012). Liquidity management involves ensuring that bank has ability to be able to service short term obligations to avoid insolvency and same time earn optimal revenues from investment (Basel, 2013). Proper liquidity management plays an essential role in maintaining the general success of a firm (Neupane, & Subedi, 2013). Liquidity is of primary importance for the survival of a firm in the short term and long term due to its influence on profitability of organizations. Profitability measures the economic success of a firm irrespective of cash flow in the firm (Maness & Zietlow, 2005). According to Macharia, (2013) there profitability and liquidity of Commercial Banks in Kenya are positively related. Al-Tamimi and Obeidat, (2013) on the other hand investigated liquidity management in Commercial Banks of Jordan for eight years period. The findings was that commercial banks level of profitability was positively related to level of liquidity and capital liquidity levels. This was attributed to the commercial banks’ ability to invest and customer confidence by knowing that the 17 bank was stable. Liquidity risk that comes with maintaining low liquidity levels had effect of constraining banks’ profitability. This however tends to contradict Ibrahim, (2017) who conducted a study on the impact of liquidity on the profitability of Iraqi commercial banks measured by current ratio. The study found that an increase in liquidity ratios would not necessarily result in increased returns on assets. The study findings however cannot be fully generalized as the study was done internationally, the current study will aim at providing local empirical evidence. Bassey, (2017) found there was a correlation between the performance of deposit money banks in Nigeria and liquidity management. However, Konadu, (2009) in a study in Ghana concluded that liquidity reduced financial performance levels on the firms operating in Ghana banking industry. In Canada, Graham and Bordeleau, (2010) found that there liquidity and financial performance was about determining the optimal levels of beyond which liquidity reduced bank financial performance. Majakusi, (2016) studied the impact liquidity management has on returns of commercial banks for a period of four years (2010 to 2014). The study measured liquidity using current ratio. The findings were that there were frequent fluctuations in the financial performance of the banks while liquidity and capital adequacy remained fairly constant. Similar findings were obtained by Ogol, (2011) used current ratio as a measurement and established that liquidity practices meant to reduce risk at MFIs negatively impacted on the financial performance of the financial institutions. The study suggested that the microfinance institutions to maintain optimal cash levels that do not hurt profitability. 2.3.4 Financial Risk Management and Financial Performance of Commercial Banks Financial risk management practices are usually designed to reduce adverse consequences of financial decisions being made by the commercial institutions (Wanjohi, 2013). This entails the 18 process of identifying, minimizing and controlling effects of uncertain events in a firm. Risk management framework is a must for any commercial bank; it’s a requirement in most countries in addition to the banks having it to reduce negative impact of operational and financial decisions. Without proper management of risks an organization is likely to be faced with operational and credit problems that negatively affect the financial performance (Mutuku, 2016). This is supported by Kargi, (2011) who investigated effect of treasury control and budgeting control on the Nigeria firms in manufacturing profitability and revealed that money control and cash budgeting had fine and non-large courting with profitability. Tafri et al, (2009) on the other hand examined the relationship between profitability and financial risk of Islamic banks and conventional in Malaysia between 1996 and 2005. The findings were that there was significant impact on profitability due to risk management mechanisms put in place by Islamic banks and conventional banking institutions. Liquidity risk was measured by current ratio while exchange risk was measured by the level and amount of exchange gains and losses. In all banks category, interest rate did not significantly affect financial performance based on equity measures. Interest rate risk however had significant impact on financial performance measured by return on assets on conventional banks. Profitability was not affected in a significant way by liquidity of conventional and Islamic banks. While these findings are important and guiding to this study, Tafri et al (2009) did not determine the exact financial risk management practices employed by the various sizes and categories of banks. This coincides with Gakure et.al, (2012) who assessed how credit techniques affected performance of commercial banks. The findings by this study indicated that risk management on credit improved commercial banks financial performance. Although the study did not examine the various credit management techniques and their effect on loans, the study confirmed the 19 importance of credit management among commercial banks in meeting banks objectives. Similarly, Kuria, (2016) on a study on the effectiveness of operational risk control and management at Co-operative bank established that there was a need for an effective monitoring process in risk management, though was not able to fully distinguish the association existing in- between the operational risk management and profitability of selected commercial banks. On the contrary, Li and Zou, (2014) who sought to expound on the relationship between risk on loans and financially assessed performance of profit making banks in Europe between the period of 2007 and 2012. The empirical study recognized that management of risk in advancing credit did not have a positive outcome on profits of banking institutions. This concurs with Rundassa and Batra, (2016) who examined and concluded that asset quality and capital adequacy ratios were insignificant to affect ROA, while management soundness, earnings and liquidity ratio were significant. Nyabicha, (2017) studied the effect of financial risk management on the banks trading at Nairobi Securities Exchange financial performance. To quantity credit risk, nonperforming loans to total loans was used while interest rate risk was measured by percentage of interest expense to total interest income. The study found a statistically non-significant association amongst financial exposure management and bank financially assessed performance in Kenya. The study however focused only on the commercial banks trading at the Nairobi Securities Exchange and not all commercial banks in Kenya. 2.3.5 Banks Size, Treasury Management Practices and Financial Performance Empirical evidence indicates that treasury management practices and financial performance depend on size of the bank. Central Bank of Kenya recognizes this and reports financial performance of commercial banks by category of the bank. Central Bank of Kenya classifies banks into three tiers: Tier One are the large banks, Tier two are the medium sized banks, Tier three are 20 the small commercial banks (CBK, 2017). It is based on this that this study used bank size as a moderating variable. To achieve this, analysis was done by bank size where results from the various categories was carried out. According to Lee (2009) bank size has significant effect on profitability although the relationship was nonlinear meaning that gains in profitability reduced for larger firms. This coincides with Lipunga, (2014) who conducted a study on the determinants of profitability of listed commercial banks in developing countries specifically focusing on Malawi during the period 2009-2012 using internal-based and external (market)-based profitability measurements and found out that bank size has a statistically significant impact on ROA however capital adequacy has insignificant effect. Despite the study confirming that bank size does have an influence on the profitability of commercial banks, it was done from an international perspective hence cannot be equally compared locally. Similarly, Smhan and Al-khatib (2015) who examined the determinants of financial performance of Jordan Islamic banks revealed a significant positive relationship between equity ratio, inflation, and bank size and ROA. This compares with Awojobi et al. (2011) who empirically investigated the key determinants of bank risk management efficiency in Nigeria and showed that bank capital adequacy is positively associated with liquidity, bank size and market risk. Bank size from results was proven to be statistically insignificant. While Waiyera (2017) investigated the factors that influence bank profitability in Kenya and found that bank size, a bank specific factor, had a significant positive correlation with bank profitability. This is in line with Pervan and Josipa (2012) who examined the influence of firm size on its business success. The analysis was conducted for the 2002-2010 period and the results revealed that firm size had a significant positive influence on firm profitability. Additionally, results showed 21 that assets turnover and debt ratio also statistically significantly influence firms’ performance while current ratio didn’t prove to be an important explanatory variable of firms’ profitability. The study findings did not focus specifically on the commercial banks and the current study will aim at addressing this. 2.4 Summary of Literature Review and Research Gaps The reviewed literature has shown that proper treasury management is integral in enhancing the returns of commercial banks. The reviewed theories namely; Risk Management Theory and Liquidity Preference Theory indicated the need for incorporating treasury management in commercial banks and the theorized outcomes to be anticipated. However, the empirical studies conducted have revealed inconsistent and contradictory findings on the nature and direction of the effects that adoption of treasury management practices have on financial performance profit oriented banks specifically in Kenya. The difference in the findings obtained by the studies could be due to differences in methodologies, variables investigated and time frame. The studies conducted have also focused generally on individual treasury management practices and their effect on the performance of the commercial banks without investigating the general impact of the combined use of treasury management practices on their financial performance. Additionally, most of the literature conducted both in the developed and developing countries, have inconsistent findings. It is based on these identified gaps that this study aimed to fill these knowledge gaps by conducting the study in Kenya on financial performance and treasury management practices. 22 2.5 Conceptual Framework The framework presents the study concept on the relationship between the studied dependent and examined independent variables by this study. The conceptual framework for the study as shown by Figure 2.1 It indicates that the predictor variables include the various management techniques used to run treasury function of commercial banks, the moderating variable which was the bank tier while the dependent variable was the financial performance of the commercial banks. Independent Variable Dependent Variable Moderating Variable Investments • Overdrafts/short term loans • Government Securities Liquidity Management  Cash and Cash Equivalents Customer call deposits  Current ratio Funding  Deposits by Customer  Non Deposit Short term Borrowings  Long Term Borrowings Financial Risk Management  Foreign currency risk  Interest rate risk  Credit risk Bank Profitability  DuPont Model (ROE) Bank Tier  Large- Tier 1  Medium- Tier 2  Small- Tier 3 23 Figure 2. 1 Conceptual Framework Source: Researcher, 2019 As shown by Figure 2.1, Funding strategies was measured by the weight of customer deposits to total assets, short term non deposit borrowings to total assets and long term borrowing to total assets. The data was obtained from bank financial reports on annual basis per bank. The data to be obtained per year was the amount of customer deposits, other short term non deposit borrowings, long term borrowings and total assets. Investment strategies were measured by weight of amount invested in short term loans given to customers to total assets and amount of government securities investment to total assets. This was obtained from commercial banks financial statements on annual basis. Liquidity management was measured by cumulative weight of cash and cash equivalents to total customer call deposits and total current assets to current liabilities. Data will be obtained from commercial banks financial statements annually. Data obtained was amount of cash equivalent, total call deposits and current assets and current liability amounts (Kiiru, 2013; Mallick, & Yang, 2011). Financial risk management, was determined using foreign currency, interest rate and credit risk as used by Mwangi, (2014) and Mutuku, (2016) on their respective studies on management of risk management and effect on financial performance among commercial banks. Foreign currency risk be measured by amount of exchange loss/gain to total income. Interest rate risk was measured by interest expense to total income while credit risk was quantified by the ratio non-performing loans to total loans advanced. Data was obtained from the banks financial statements per year and will relate to exchange loss or gain per year, total income, total interest, total income, non-performing loans and loan advances. 24 The dependent variable which was the commercial banks financial performance was measured by the DuPont model obtained by multiplying profit margin by total asset turnover and financial leverage. Information will be obtained from financial statements of commercial and CBK supervisory reports. This will be computed by weight of net income to total sales, sales over total assets, total assets to average shareholder equity. Statistics obtained on annual basis will be net income, total sales, total assets and shareholders’ equity. DuPont model will be used since it is a comprehensive measure of commercial banks’ financial performance (Mallick, & Yang, 2011). 25 CHAPTER THREE: RESEARCH METHODOLOGY 3.1 Introduction This chapter details the methodology which was implemented in addressing the research objectives. The chapter discusses chronologically the research design, population of the study, sampling methods, data collection instruments and the data analysis techniques which was used. The chapter also describes the research quality measures and the ethical considerations which were met. 3.2 Research Philosophy The two main paradigms that guide research in social sciences are the positivist and phenomenological paradigms. Positivist paradigm posits that to empirically establish the correlation between two variables in a study and to formulate and test hypotheses. This philosophy is based on the assumption that universal scientific propositions are true only if the observed effects have been verified by empirical tests (Saunders, Lewis & Thornhill, 2003). This study adopted positivist research philosophy. Decision on this design was premised on theory and a conceptual model from hypotheses drawn. This philosophy requires quantitative data and corresponding analytical techniques. This paradigm further involves operationalizing concepts so that they can be measured, and taking large samples (Kothari, 2004). 3.3 Research Design According to Kothari, (2004) research design refers to the plan, outline or arrangement of activities of a particular research that facilitate comprehensive data collection and analysis. It is an organization of the conditions for proper gathering and analysis of collected data to attain relevance of the research purpose. The study used a descriptive research design. 26 As described by Kothari (2004), the design entails a methodical and empirical review where the researcher has no control over the study variables as they already exist or cannot be manipulated. The research design facilitates making inferences pertaining to the variables of the study both dependent and independent and enabling making of valid conclusions where possible hence the most appropriate for the study. A descriptive research was used to assess the relationship that exists between the study variables; namely, treasury management and financial performance of commercial banks in Kenya. 3.4 Target Population The population targeted by a study entails the specific individuals or elements about which information is desired (Kothari, 2004). For this empirical study, the population targeted comprised of all the commercial banks in Kenya licensed by the CBK as per the banking supervision annual report 2018 which were 43 (Appendix I). 3.5 Sampling Sampling was not applied by this study based on knowledge that the population was small size. Thus, the study used a census sampling approach so as to cover all 43 commercial banks in Kenya. This refers to a sampling approach whereby there is complete enumeration of all items in a population. The use of census sampling approach is recommended by Creswell, and Creswell, (2017) who indicate that where the study population is manageable due to the small size, the entire population should be used so as to facilitate equal representation of the study elements. This is same argument that was advanced by Cooper and Schindler (2014) who argued that census approach should be used to ensure that the results are reliable and accurate. 27 3.6 Data Collection Procedures Data collected by the study was both primary and secondary data. Primary data was used to collect cross sectional data, to capture non quantitative aspects of the study that may not be established from data collected and hence validate the results of quantitative analysis. The respondents were the respective banks’ treasury managers. These respondents were chosen due to their direct involvement with the treasury management of the commercial banks hence the most conversant for the study. The information collected pertained to the treasury management practices employed. The primary data was obtained using semi-structured questionnaires containing open ended and close ended questions. The preference of questionnaires is due to their being economical and able to collect a wide range of data within the shortest time possible. The questionnaire was structured to cover the non-quantitative aspects whereby each section addressed the study's specific objectives. Section A was on the general information on commercial banks, Section B on treasury management practices adopted by the commercial banks and Section C on the perceived treasury management practices applied by commercial banks. Questionnaires enabled capturing the respondents view pertaining to objective one, the treasury management practices employed in the commercial banks as well as data on other variables affecting treasury management. From the sections, the respondents’ views were ranked using a Likert Scale and this mainly involved awarding a score on the range of 1-5 and on various aspects some brief explanations will be required. The questionnaires were administered through a drop and pick method which will gave the respondents ample time to fill and return the questionnaires. Follow ups were done through calls and emails by the researcher and questionnaires were collected after a period of two weeks. 28 Secondary data on the other hand was used to collect longitudinal data to enable quantitative assessment and hence provide more reliable and accurate results. This related to the information pertaining to the treasury management influence on financial performance measures. Secondary data was obtained and summarized using data collection sheet and included measures of the financial performance for the period, 2013 to 2017. The data was collected from the annually published commercial banks’ financial statements. Some of the information collected included Return on Assets, Total Assets owned, Annual Number of Non-Performing Loans, Total Capital Investments and Current Liabilities. This enabled determination of how treasury management impacted on financial performance of commercial banks. 3.7 Data Analysis and Presentation The obtained data was fed to Statistical Package for Social Sciences (SPSS) version 21 and STATA version 15 was used to analyze the data. The two analysis software was used due to the nature of the data and also ensure that the findings were reliable and accurate. This was important in overcoming the inherent limitations of the two systems. The questionnaire data was cross sectional and thus SPSS was best suited to analyses the data. Secondary data was panel data and thus STATA was the best to provide the underlying relationship by considering the time series effect in the data. To determine the treasury management used by commercial banks in Kenya, data collected from the questionnaire were used. Descriptive statistics like the mean and standard deviation will be used to describe the data. To evaluate the effect of treasury management and performance of commercial banks in Kenya, secondary data analysis was used. Inferential analysis including panel data and regression were used to determine the relationship between the dependent and independent variables. The results were then presented in tables from which the interpretations were drawn. To examine the perceived 29 influence of treasury management on commercial banks in Kenya financial performance, questionnaire was used. Descriptive statistics like the mean and standard deviation were used to describe the data. 3.7.1 Analytical Model To assess the relationship between treasury management and commercial banks financial performance, the study adopted the following panel data model; Yi=β0+ β1X1t+ β2X2t+ β3X3t+ β4X4t +ε (Equation 3.1) Where: Yi= Dependent Variable (Financial Performance of Commercial banks assessed measured by DuPont analysis) ß0= Intercept ß1 and ß4= Coefficient of the independent variables X1t= Funding Strategies at time t X2t= Investment Strategies at time t X3t= Liquidity Management at time t X4t= Risk Management at time t ε = error term To test the moderating effect of bank size on the relationship between treasury management and financial performance of commercial banks in Kenya, panel data was done on each bank size. Initial panel data analysis was done on all commercial banks followed by panel analysis per tier. The model had the following format: 30 Yiz=β0+ (β1X1t)Z + (β2X2t)Z + (β3X3t)Z + (β4X4t)Z +ε (Equation 3.2) Where: Yiz= Dependent Variable (Financial Performance of Commercial banks assessed measured by DuPont analysis across the various bank sizes) ß0= Intercept ß1 and ß4= Coefficient of the independent variables X1t= Funding Strategies at time t X2t= Investment Strategies at time t X3t= Liquidity Management at time t X4t= Risk Management at time t Z= Bank Size ε = error term Analysis was done across each tier of commercial banks to assess how treasury management affects financial performance across the bank tiers. The study variables applied by the study are operationalized in table 3.1 below: 31 Table 3. 1 Operationalization of the Study Variables Variable Indicators Type of analysis Independent  Funding strategy were measured by the weight of customer deposits to total assets, short term non-deposit borrowings to total assets and long term borrowing to total assets. The data was obtained from bank financial reports on annual basis per bank. The data to be obtained per year were amount of customer deposits, other short-term borrowings, long-term borrowings and total assets.  Investment strategy was measured by weight of amount invested in short term loans given to customers to total assets and amount of government securities investment to total assets. This was obtained from commercial banks financial statements on annual basis. Descriptive statistics Panel Data  Liquidity strategy was measured by cumulative weight of cash and cash equivalents to total customer call deposits and total current assets to current liabilities. Data was obtained from commercial banks financial statements per annum. Data obtained were amount of cash equivalent, total call deposits and current assets and current liabilities. 32 Variable Indicators Type of analysis  Financial risk management was measured by cumulative weight of foreign currency exchange risk, interest risk and credit risk. Foreign currency risk was measured by amount of exchange loss/gain to total income. Interest rate risk was measured by interest expense to total income while credit risk was measured by non-performing loans to total loans advanced. Data was obtained from commercial bank financial statements per year. Data collected related to exchange loss or gain per year, total income, total interest, non-performing loans and loan advances.  Bank tier was obtained from CBK supervisory reports showing whether the bank is large, medium or small. Large banks were coded 3, 2 medium, 1 small. Dependent  Bank profitability was computed using DuPont analysis using information obtained from bank financial statements and CBK supervisory reports. This was computed by weight of net income to total bank revenue, total bank revenue over total assets, total assets to average shareholder equity. The information was obtained from supervisory reports. Statistics obtained on annual basis were net income, total bank revenue, total assets and shareholders’ equity. Descriptive statistics Panel Data 33 3.7.2 Diagnostic Tests Diagnostic tests were done to ensure research quality and included normality and multi- collinearity. These were the main assumptions of linear regressions which must be met before the analysis was done. Multi-collinearity test was conducted on the regression model so that wrong conclusions about the relationship between dependent variable and independent variables were avoided. Hausman test was used to determine the nature of time series effect on the data and thus assess the best technique to use. 3.8 Research Quality Quality research is about the scientific process encompassing all aspects of study design. It is the systematic process of ensuring that the results of the study are accurate, reliable and inferences drawn are genuine and applicable in an accurate manner (Kothari, 2004). The study quality was ensured by secondary data and using both primary and objective interpretation of the study results. 3.8.2: Reliability of Data Collection Instruments Reliability is the ability of research measurement constructs to yield consistent results among the respondents (Kothari, 2004). Reliability was evaluated by use of Cronbach's alpha and instruments updated where reliability was not met. Cronbach’s alpha coefficient range between 0 and 1. The values obtained for all the variables were ensured they are higher than 0.7. This was achieved through rephrasing the questions with low alpha or dropping them. For the secondary data, the researcher ensured that the data was obtained from its original source and not from a source where data might have been manipulated and altered. The Cronbach alpha results obtained are presented in table 3.2 with detailed findings in Appendix II. 34 Table 3.2: Operationalization of the Study Variables Variable No of Items Cronbach Alpha Funding Strategies 4 0.861 Investment Strategies 4 0.798 Liquidity Strategies 5 0.798 Risk Management Strategies 11 0.830 Financial Performance 4 0.738 The findings indicate that funding strategies had a Cronbach alpha of 0.861, investment strategies, 0.798, liquidity strategies 0.798, risk management strategies 0.830 and financial performance 0.738. The values were above 0.7 and thus the constructs were reliable. 3.8.2 Validity of Data Collection Instruments Validity is termed as the level of the accuracy of a claim (Polit, & Beck, 2012). The instrument was evaluated for content validity; the questionnaire contents included the use of appropriate vocabulary, sentence structure and whether the questions are suitable for the intended respondents. To achieve this, a draft questionnaire was developed. The final questionnaire was also pre-tested and necessary adjustments made before the actual study was conducted. Coherence and accuracy of the study data collection tools (questionnaire) and daily cleaning of data was ensured. To ensure the validity of the secondary data results, the researcher triple checked the data collection and calculation processes. 3.9 Ethical Issues in Research Ethical standards in the study was safeguarded through fully acknowledging information sources and permission to collect data sought from the university and commercial banks. All information obtained will be used for academic purposes only and treated with confidentiality. In addition, no 35 organization or any individual was harmed by this study. Participation was also voluntary without coercion or enticement and privacy ensured throughout the study period. 36 CHAPTER FOUR: PRESENTATION OF RESEARCH FINDINGS 4.1 Introduction The study intended to assess the effect of treasury management on the commercial banks financial performance in Kenya. The current chapter presents the research findings obtained, data analysis and interpretation on the specific objectives of the study. Descriptive and inferential statistics were used to achieve study objectives. 4.2 Secondary Data Analysis Data obtained from all the 43 commercial banks for the period 2013 to 2017 was used. Secondary data analysis was done using panel data. 4.2.1 Step Wise Regression Step wise regression was done to confirm whether the measures used to compute the dependent variables were important in determining the independent variables used in the regression and panel data. The findings are presented in Table 4.1 with the individual panel analysis being presented in Appendix IV. Table 4.1: Step Wise Regression Results Unstandardized Coefficients Standardized Coefficients t Sig. Collinearity Statistics Variable Construct B Std. Error Beta Tolerance VIF R Funding Strategy Customer Deposits 0.047 0.005 0.497 9.19 0.000 0.733 1.364 0.757 Short Term non deposit borrowings* -0.051 -1.08 0.281 -0.077 0.978 1.023 0.721 Long term borrowings 0.037 0.005 0.369 6.817 0.000 0.733 1.364 Investment Strategies Short Term Deposits advanced 0.007 0.003 0.124 2.591 0.010 0.573 1.746 0.859 37 Unstandardized Coefficients Standardized Coefficients t Sig. Collinearity Statistics Variable Construct B Std. Error Beta Tolerance VIF R Government Securities* -0.177 -1.171 0.243 -0.083 0.057 17.391 0.055 Liquidity Strategies Cash and Cash Equivalent 0.013 0.003 0.121 3.614 0.000 0.887 1.128 0.895 Customer call deposits* -0.113 -1.805 0.073 -0.127 0.254 3.941 0.225 Current Ratio -1.269 0.05 -0.847 - 25.237 0.000 0.887 1.128 Risk Management Strategies Forex gain loss 0.059 0.016 0.248 3.784 0.000 0.992 1.008 .397 Interest expense -0.002 0.001 -0.173 -2.637 0.009 0.992 1.008 Non- performing loans 0.106 0.028 0.248 3.798 0.000 0.995 1.005 Forward (Criterion: Probability-of-F-to-enter <= .050) *Indicates dropped variables Under funding strategy (R= 0.757, p<0.05), the retained measures were customer deposits (B= 0.047, p<0.05) and long term borrowings (B= 0.037, p<0.05) and dropped variable was short term non deposit borrowings (B= -0.051, p>0.05). On the investment strategies (R=0.859, p<0.05), the retained measure was short term loans advanced (B= 0.007, p<0.05). Government securities (B= -0.177, p>0.05) was dropped. Under liquidity strategies (R= 0.895, p<0.05), the constructs retained were cash and cash equivalent (B= 0.013, p<0.05) and current ratio (B= -1.269, p<0.05). Customer call deposits (B= -0.113, p>0.05) was dropped. Under risk management strategies (R= 0.397, p<0.05), all measures were retained that included forex gain loss (B= 0.059, p<0.05), interest expense (B= -0.002, p<0.05) and nonperforming loans (B= 0.106, p<0.05). The retained variables were used in computing the value of the independent variables for panel data analysis. 38 4.2.2 Descriptive Statistics Descriptive statistics were obtained to determine the distribution of the study independent and dependent variables. The findings are presented in Table 4.2. Table 4.2: Descriptive Statistics Variable N Min Max Mean SD Skewness Kurtosis Financial performance 202 0.47 0.84 0.6069 0.0764 0.744 0.286 Funding Strategies 202 1.26 4.25 2.313 0.68955 0.875 -0.171 Investment Strategies 202 0.9 3.97 1.2929 0.95101 0.948 0.189 Liquidity Strategies 202 1.15 2.85 2.0092 0.36118 0.589 -0.024 Risk Management Strategies 202 0.09 13.56 1.245 2.15244 1.872 1.901 Customer Deposits 202 1.61 4.68 2.7607 0.81423 0.766 -0.76 Long term borrowings 202 0 3.96 1.8654 0.76918 0.47 -0.274 Short Term Deposits advanced 202 0 4.68 1.2493 1.35305 0.156 0.117 Cash and Cash Equivalent 202 1.2 4.6 2.899 0.73792 0.577 -0.156 Current Ratio 202 0.88 1.22 1.1195 0.05099 -0.553 0.868 Forex gain loss 202 0.01 2.41 0.0774 0.32212 1.205 1.52 Interest expense 202 0.06 40.45 3.4374 6.47904 1.58 1.328 Non-performing loans 202 0.01 1.82 0.2203 0.17836 1.68 1.525 Financial performance had a lowest of 0.47, highest of 0.84, mean of 0.6069, standard deviation of 0.0764, kurtosis of 0.744 and skewness of 0.286. Funding strategies had a lowest of 1.26, highest of 4.25, mean of 2.313, standard deviation of 0.68955, skewness of 0.875 and kurtosis of -0.171. Investment strategies had a lowest of 0.9, mean of 3.97, highest of 1.2929, standard deviation of 0.95101, skewness of 0.948 and kurtosis of 0.189. Liquidity strategies had a lowest of 1.15, highest of 2.85, mean of 2.0092, standard deviation of 0.36118, skewness of 0.589 and kurtosis of -0.024. Risk management strategies had a lowest of 0.09, highest of 13.56, mean of 1.245, standard deviation of 2.15244, skewness of 1.872 and kurtosis of 1.901 after standardization. 39 The study constructs that included customer deposits, long term borrowings, short term deposits advanced, cash and cash equivalent, current ratio, forex gain loss, interest expense and non- performing loans also had kurtosis and skewness of +/-2 which implied that they were normally distributed. Thus, the study variables were distributed around the mean implying lack of outliers and normally distributed and thus appropriate for data analysis. 40 4.2.4 Effect of Treasury Management and Financial Performance of All Commercial Banks The study objective was to establish the influence treasury management has on financial performance of commercial banks. To achieve this, banks were classified into three categories and inferential statistics for each category of bank determined to indicate the relationship between treasury management and financial performance for three categories of banks. Secondary data was used to achieve this objective. The results of the panel data analysis for all commercial banks obtained as shown by Table 4.4. The study obtained an overall R2 of 0.6557, p<0.05. This implied that treasury management practices accounted for up to 67.57% of the total variation of the financial performance of commercial banks (R2=0.6757). This means only 32.43% of the changes in the financial performance of the commercial banks is accounted for by other factors not presented in the model. Therefore, treasury management practices have a strong positive effect on the financial performance of commercial banks. 41 The test of model fitness results also shows that the model, F (4,151) = 48.4, P <.05 qualified for further analysis. The results implied that the predictor variable were appropriate predictors of performance of commercial banks hence able to significantly explain changes in the financial performance at any particular time. Further, model coefficients obtained funding strategies (B= 0.018, p<0.05), investment strategies (B= 0.046, p<0.05) and liquidity strategies (B= 0.043, p<0.05) indicated that the variables had positive effect on financial performance of commercial banks which was significant. Risk management had a minimal negative effect on financial performance of commercial banks (B= -.006, p<0.05). This could be explained by risk return trade off and the fact that risk is integral in maximizing financial performance. 4.2.5 Effect of Treasury Management and Financial Performance of Small-Sized Commercial Banks Further, panel data analysis was used to assess how treasury management practices combined affected financial performance of small category commercial banks. The results of the regression analysis obtained are presented in Table 4.5. 42 Table 4. 5: Small Banks Panel Analysis The study obtained an overall R2 of 0.5931, p<0.05. This implied that treasury management practices accounted for up to 59.31% of total variation of the financial performance of small sized commercial banks (R2=0.5931). Consequently, 40.69% of the changes in the financial performance of the commercial banks is accounted for by other factors not presented in the model. Therefore, treasury management practices have a strong positive effect on the financial performance of the small commercial banks. The test of model fitness results also shows that the model, F (4, 77) = 11.91, P <.05 was valid for further analysis. This meant that the independent variables are a good predictor of variations in performance of the commercial banks hence able to significantly explain changes in the financial performance at any particular time. Further, model coefficients obtained funding strategies (B= 0.019, p<0.05), investment strategies (B= 0.035, p<0.05) and liquidity strategies (B= 0.128, p<0.05) indicated that the variables had positive and significant effect on financial performance of commercial banks. Risk management had a minimal negative effect on financial performance of F test that all u_i=0: F(32, 77) = 7.45 Prob > F = 0.0000 rho .80880096 (fraction of variance due to u_i) sigma_e .02042268 sigma_u .042004 _cons .272456 .0446132 6.11 0.000 .1836197 .3612923 Risk_Manag~s -.0105225 .0023451 -4.49 0.000 -.0151922 -.0058529 Liquidity_~s .1277459 .0280863 4.55 0.000 .071819 .1836729 Investment~s .0352534 .0173224 2.04 0.045 .0007602 .0697467 Funding_St~s .0197899 .0129721 1.53 0.131 -.0060407 .0456206 Financial_~e Coef. Std. Err. t P>|t| [95% Conf. Interval] corr(u_i, Xb) = -0.1171 Prob > F = 0.0000 F(4,77) = 11.91 overall = 0.5931 max = 5 between = 0.5180 avg = 3.5 R-sq: within = 0.3821 Obs per group: min = 1 Group variable: Bank Number of groups = 33 Fixed-effects (within) regression Number of obs = 114 43 commercial banks (B= -.011, p<0.05). This meant that for small sized commercial banks to maximize their financial returns, they required to assume certain level of risk. 4.2.6 Effect of Treasury Management and Financial Performance of Medium Commercial Banks To determine the effect of treasury management on financial performance of medium commercial banks, panel data analysis was undertaken. Results are presented in Table 4.6. The test of model fitness results also shows that the model, F (4, 35) = 9.13, P<.05 was valid for further analysis. This meant that the independent variables are a good predictor of variations in performance of the commercial banks hence able to significantly explain changes in the financial performance at any particular time. Further, model coefficients obtained for funding strategies (B= 44 0.006, p<0.05) and investment strategies (B= 0.044, p<0.05) indicated that the variables had positive and significant effect on financial performance of commercial banks. Liquidity strategies (B= -0.01, p<0.05), risk management (B= -.003, p<0.05) had negative effect on financial performance of commercial banks. This meant that for medium commercial banks to maximize their financial returns, they needed to concentrate more on funding and investment strategies. Liquidity and risk management strategies were important but to a certain level. 45 46 4.3 Primary Data Analysis Primary data was collected through use of questionnaires to enable assessment of the effect of perceived treasury management practices on financial performance of commercial banks in Kenya. 4.3.1 Demographic Characteristics of the Respondents Demographic information was sought by the study to assess the ability of the respondent to provide reliable information. Information sought included the position and number of years worked at the commercial bank. The findings are presented in Table 4.8. Table 4.8: Demographic Characteristics of the Respondents Item Frequency Percent Response Rate Responded 34 79% Not Responded 9 21% Position of the Respondents Top Management 8 23% Middle Level 22 64% Low Level Management 4 13% Respondents Working Duration Less than 5 years 0 0% 5 – 10 years 5.1 15% 10 – 15 years 11.22 33% 15 – 20 years 10.54 31% Over 20 years 7.14 21% KMO and Bartlett's Test Kaiser-Meyer-Olkin Measure of Sampling Adequacy Approx. Chi-Square 0.646 Bartlett's Test of Sphericity Df 33 Sig 0.000 The target population in the study was total of 43 respondents who were respective banks’ treasury managers. A total of 43 questionnaires were distributed. 34 of them were properly completed and returned. This translated to a response rate of 79%. The KMO measure of sampling adequacy 47 indicated a chi square of 0.646 which was close of 0.5 implying that the sampling was adequate for analysis and results were valid. Bartlett's Test of Sphericity results indicated a p<0.05 which implied that there was a relationship on the study variables and the data met structural detection and analysis. Detailed findings of the study are presented in Appendix VI. The response rate is considered justified and very good in determination of the phenomenon under study as it conforms to Kothari (2004) assertion that of, above 75% to be very appropriate so as to enable generalization of the findings. The results obtained indicated that 64% of the respondents were middle level managers, 23% were top managers and 13% were employees. This implies that majority of the respondents (87%) were from managerial positions hence well informed on the treasury management practices and its role in financial performance of the commercial banks. As shown, 33% of the respondents had worked in the banks for the duration of 15-20 years, 31% a duration of 10-15 years, 21% a duration of 5- 10 years and 15% a duration of over 20 years. This indicates that majority (79%) of the respondents had worked at the banks for a considerable length of time of over 10 years they were therefore conversant with the banks’ operations hence gave reliable information. 4.3.2 Treasury Management Practices Adopted by Commercial Banks The study first objective was to determine the treasury management practices used by commercial banks in Kenya. The study investigated the extent to which various treasury management practices have been adopted by commercial banks in Kenya. Particularly, the treasury management practices studied included funding strategies, investment strategies, liquidity management and risk management strategies. This was investigated by use of questionnaires. 48 4.3.2.1 Funding Strategies adopted by Commercial Banks The study sought to determine funding strategies put in place by the banks. The respondents were required to rate the statements using a Likert scale of 1-5, where higher value represents high extent. The findings obtained are presented by Table 4.9. Table 4.9: Funding Strategies adopted by Commercial Banks Funding Strategies N Mean Std. Deviation The bank has short term funding policy that guides treasury 34 3.74 1.499 There is a list of approved sources of short term funds 34 3.41 1.163 The bank mainly uses deposits as a source of short term funding 34 2.46 1.354 Short term funding is done mainly to protect banks liquidity as opposed to financial performance 34 2.79 1.128 As shown by table 4.9, on the Funding Strategies adopted by Commercial Banks, the respondents stated a large extent on the bank has short term funding policy that guides treasury having a mean of 3.74 and standard deviation of 1.499. On there is a list of approved sources of short term funds, the respondents indicated a moderate extent with a mean of 3.41 and standard deviation of 1.163. However, on short term funding is done mainly to protect banks liquidity as opposed to financial performance and the bank mainly uses deposits as a source of short term funding, the respondents stated a small extent having means of 2.79 and 2.46 respectively. This implies that the most utilized funding strategy was short term funding policy while deposits as a source of short term funding was the least. Funding from investment partners, increased focus on customer deposits as savings and use of term deposits were considered as other forms of funding strategies. Therefore, there is 49 need for the commercial banks to diversify and innovate newer funding strategies so as to remain profitable and improve their financial performance. 4.3.2.2 Investment Strategies adopted by Commercial Banks The study investigated the investment strategies put in place by the banks. The respondents were required to rate the statements using a Likert scale of 1-5, where higher value represents high extent. The findings obtained are presented by Table 4.10. Table 4.10: Investment Strategies adopted by Commercial Banks Investment Strategies N Mean Std. Deviation The bank has a short term investment policy that guides treasury 34 2.54 1.232 There is a list of approved investment instruments that can be used 34 3.05 1.213 The bank mainly invests in treasury bills/bonds 34 3.03 1.46 Short term investments are done mainly in consideration of banks liquidity as opposed to financial performance 34 3.23 1.385 As shown by Table 4.10, on investment Strategies adopted by Commercial Banks, the respondents stated a moderate extent of implementation on the list of approved investment instruments that can be used, the bank mainly invests in treasury bills/bonds and short term investments are done mainly in consideration of banks liquidity as opposed to financial performance having means of 3.05, 3.03 and 3.23 respectively. However, on the bank has a short term investment policy that guides treasury, the respondents stated a small extent of adoption with a mean of 2.54 and standard deviation of 1.232. This implies that none of the investment strategies put in place by the commercial banks had an above average level of adoption indicating that the banks still had imminent gaps on how they undertook their investments. 50 4.3.2.3 Liquidity Strategies adopted by Commercial Banks The study studied the liquidity strategies put in place by the banks. The respondents were required to rate the statements using a Likert scale of 1-5, where higher value represents high extent. The findings obtained are presented by Table 4.12. Table 4.12: Liquidity Strategies adopted by Commercial Banks Liquidity Strategies N Mean Std. Deviation There is a clear policy guideline used by the commercial bank on liquidity management 34 3.49 1.073 The bank had adopted liquidity projection systems to protect against insolvency 34 3.1 1.294 Liquidity management is the main function of treasury 34 3.62 1.091 The results obtained show that on Liquidity management is the main function of treasury, the respondents indicated a large extent having a mean of 3.62 and standard deviation of 1.091. The respondents however indicated a moderate extent of adoption on there is a clear policy guideline used by the commercial bank and the bank had adopted liquidity projection systems to protect against insolvency having means of 3.49 and 3.1 respectively. Therefore, implying that in spite of liquidity management being the core function of treasury, other aspects of liquidity management were still lagging behind in the commercial banks with only moderate extents of adoption. Other suggested liquidity management strategies included maintaining a loan deposit ratio and internal trigger levels to manage liquidity levels. 51 4.3.2.4 Risk Management Strategies adopted by Commercial Banks The study sought to determine risk strategies put in place by the banks. The respondents were required to rate the statements using a Likert scale of 1-5, where higher value represents high extent. The findings obtained are presented by Table 4.13. Table 4.13: Risk Management Strategies adopted by Commercial Banks Risk Management Strategies N Mean Std. Dev There are practices and procedures through which risk management strategies are implemented 34 3.26 1.585 The bank has mechanisms of managing foreign exchange risk 34 3.1 1.165 There is frequent risk management review by the bank 34 4.21 0.833 There is control risk self-assessment measures implemented by the bank 34 4.28 0.887 There are sound credit management practices 34 3.67 1.264 The bank constantly undertakes financial operating risk management 34 3.18 1.412 The bank has an effective process of developing and implementing risk response strategies 34 2.9 1.392 There is continuous reporting of risks to all relevant structures 34 3.36 1.53 The bank monitors the risk performance on an ongoing basis 34 2.9 1.501 The bank has an effective process of resourcing risk management response strategies and processes 34 3.36 1.495 The findings as shown by Table 4.13, imply that the respondents agreed that control risk self- assessment measures implemented by the bank to a very large extent with a mean of 4.28 and standard deviation of 0.887. The respondents indicated a large extent of adoption of frequent risk management review by the bank having a mean of 4.21 and standard deviation of 0.833. Also on 52 there are sound credit management practices, the respondents stated a large extent having a mean of 3.67 and 1.264. The respondents however stated a moderate extent of adoption of the bank has an effective process of resourcing risk management response strategies and processes, there is continuous reporting of risks to all relevant structures, there are practices and procedures through which risk management strategies are implemented, the bank has mechanisms of managing foreign exchange risk, and the bank constantly undertakes financial operating risk management having means of 3.36, 3.36, 3.26, 3.1 and 3.18 respectively. However, on the bank has an effective process of developing and implementing risk response strategies and bank monitors the risk performance on an ongoing basis the respondents indicated a small extent with each a mean of 2.9. This shows control risk self-assessment measures, frequent risk management review and sound credit management practices were the only risk management strategies indicated to be implemented to a large extent with majority of the remaining risk management practices implemented to moderate extent and some a low extent. Therefore, implying that despite the benefits gained from well-structured and executed risk management measures, the commercial banks were yet to be successful in proper implementation of all their risk management strategies. Process improvement was considered a way to improve risk management and reduce revenue leakages. 4.3.2.5 Treasury Management Practices and Financial Performance The study aimed at determining the effect of the treasury management practices employed on the financial performance constructs of the commercial banks. The respondents were required to rate the statements using a Likert scale of 1-5, where higher value represents high extent. The findings obtained are presented by Table 4.14. 53 Table 4.14: Treasury Management Practices and Financial Performance Treasury Management Practices and Financial Performance N Mean Std. Dev Treasury management improves return on capital employed 34 4.1 0.821 Treasury management leads to increased return on assets 34 3.85 1.089 Treasury management increases Return on Investment 34 3.54 1.072 Treasury management improves operating profit margin 34 3.62 0.99 Level of current financial performance attributed to treasury management practices employed 34 3.54 1.072 As shown by Table 4.14, to a very large extent, the respondents indicated that the Treasury management improves return on capital employed with a mean of 4.1 and standard deviation of 0.821. To a large extent, the respondents stated that treasury management leads to increased return on assets and improves operating profit margin having means of 3.85 and 3.62 respectively. However, on treasury management increases Return on Investment and Level of current financial performance is attributed to treasury management practices employed, the respondents were neutral implying moderate extent with each a mean of 3.52 and standard deviation of 1.072. This shows that the treasury management practices adopted had the greatest impact on the Return on Capital Employed and the least impact on Return on Investment. Therefore, treasury management practices are yet to achieve the desired effects on the financial performance especially in improvement of investments and profit margin accrued by the commercial banks. 4.3.3 Diagnostic Tests The study quality was ensured by using both primary and secondary data and objective interpretation of the study results. Diagnostic tests on regression analysis was done to ensure that assumptions of regression and quality of quantitative assessment are valid. 54 4.3.3.1 Test for Multicollinearity Multicollinearity tests was done on the regression model to avoid incorrect conclusions about the relationship between dependent and predictor variables. Variance Inflation Factor (VIF) and tolerance degree was used to indicate presence of multicollinearity test. The findings obtained are presented by Table 4.15. Table 4.15: Test for Multicollinearity Variable Tolerance VIF Funding Strategies 0.753 1.327 Investment Strategies 0.354 2.828 Liquidity Management 0.431 2.319 Risk Management Strategies 0.961 1.04 The findings obtained show that Funding Strategies had a tolerance value of 0.753 and VIF value of 1.327, Investment Strategies had a tolerance of 0.354 and VIF value of 2.828, Liquidity Management had a tolerance of 0.431 and VIF value of 2.319 and Risk Management Strategies had a tolerance of 0.961 and VIF value of 1.04. Therefore, all variables had tolerance of greater than 0.1 and VIF less than 10 and there was no multicollinearity problem. 4.3.3.2 Descriptive Statistics and Test for Normality Normality test was undertaken to ensure that the study variables are normally distributed. Skewness which is the extent to which a distribution of values deviates from symmetry around the mean was used to test normality of the data. While Kurtosis which is a measure of the "peakedness" or "flatness" of a distribution was used in testing the normality of the study variables. The normality test results are presented by Table 4.16. Detailed findings are presented in Appendix IV. 55 Table 4.16: Descriptive Statistics and Normality Test Minimum Maximum Mean Std. Deviation Skewness Kurtosis Funding Strategies 1 4.75 3.1026 1.08779 -0.205 -1.274 Investment Strategies 1.25 5 2.9615 0.89321 -0.13 0.292 Liquidity Strategies 1.75 5 3.3397 0.806 -0.158 -0.569 Risk Management Strategies 1.73 5 3.3893 0.80854 -0.324 0.003 Financial Performance 2 5 3.7756 0.74735 -0.889 0.637 The minimum statistic for Funding Strategies over the period was 1, highest of 4.75 and mean of 3.1. The lowest of the Investment Strategies over the period was 1.25, highest of 5 and mean of 0.89. The lowest of Liquidity Management over the period was 1.75, highest of 5 and mean of 3.33. The lowest of the Risk Management Strategies was 1.7, highest of 5 and mean of 3.389. While the lowest of the Financial Performance over the period was 2, highest of 5 and mean of 3.78. The results obtained show that Funding Strategies had a Skewness value of -0.205 and Kurtosis value of -1.274, Investment Strategies had a Skewness value of -.13 and Kurtosis value of 0.292, Liquidity Management had a Skewness value of -0.158 and Kurtosis value of -0.569. Risk Management Strategies had a Skewness value of -0.324 and Kurtosis value of 0.003 and Financial Performance had a Skewness value of -0.889 and Kurtosis value of 0.637. Hence, for all the variables, skewness and kurtosis statistics were within +/-2 and hence the data was normally distributed. Therefore, an indication that the normality assumption of linear regression analysis was in place and thus linear regression could be applied on the data. 56 4.3.4 Perceived Correlation of Treasury Management on Financial Performance of Commercial Banks To examine the perceived effect of treasury management on financial performance of commercial banks in Kenya from the primary data, regression analysis was computed. The independent variables were the treasury management practices namely Risk Management Strategies, Funding Strategies, Liquidity Strategies, and Investment Strategies while the dependent variable was the financial performance of the commercial banks. The findings are presented in Table 4.17. Table 4.17: Model Summary Model R R Square Adjusted R Square Std. Error of the Estimate 1 .838a 0.703 0.668 0.43075 a. Predictors: (Constant), Risk Management Strategies, Funding Strategies, Liquidity Strategies, Investment Strategies The results of the regression analysis as shown by Table 4.17 shows that treasury management practices studied were perceived to explain 70.3% of the variations in financial performance (R2=0.703). This implies that only 29.7% of the variation in the financial performance of commercial banks were perceived by the respondents to be explained by factors other than those investigated by the study. The study further undertook ANOVA analysis to establish the validity and effectiveness of the model in explaining the relationship between the perceived effects of treasury management on financial performance of commercial banks. The results are presented in Table 4.18. Table 4.18: Model ANOVA Sum of Squares Df Mean Square F Sig. Regression 14.916 4 3.729 20.097 .000a Residual 6.309 29 0.186 Total 21.224 33 57 a. Predictors: (Constant), Risk Management Strategies, Funding Strategies, Liquidity Strategies, Investment Strategies b. Dependent Variable: Financial Performance The model in Table 4.19 was found to be valid (F (4, 33) =20.097, P < .001). This means that the treasury management practices were perceived to be good predictors of variations in financial performance and were able to predict changes in the performance at any particular time. Table 4.19: Model Coefficients Unstandardized Coefficients Standardized Coefficients t Sig. Std. Error Beta (Constant) 1.373 0.349 3.93 0.000 Funding Strategies 0.684 0.117 0.996 5.85 0.000 Investment Strategies -0.547 0.181 -0.654 -3.024 0.005 Liquidity Strategies 0.257 0.148 0.277 1.734 0.092 Risk Management Strategies 0.307 0.112 0.332 2.731 0.01 The value of the constant in Table 4.19 shows that the performance of the commercial banks will always exist at a certain minimum (β0 =1.373, P < 0.05). All the independent variables except investment strategies were perceived to influence the performance of the commercial banks positively namely; Funding Strategies (β1 = 0.684, P =0.05), Liquidity Strategies (β3 = 0.257, P =0.092) and Risk Management Strategies (β4 = 0.307, P =0.01). This implies that an increase in these strategies were perceived to result in increased financial performance. However, Investment Strategies (β2 = -0.547, P =0.005) was perceived to influence negatively the financial performance of the commercial banks. All the variables except Liquidity Strategies, have a p-value less than 5% (P < 0.05) meaning that, when all variables in this study are combined they are significant in explaining the variations in financial performance of the commercial banks. 58 CHAPTER FIVE: SUMMARY, DISCUSSION, CONCLUSION AND RECOMMENDATIONS 5.1 Introduction The study intended to investigate the effect of treasury management on financial performance of commercial banks in Kenya. This chapter presents; the summary and discussion of the findings, conclusions and recommendations of the study. 5.2 Summary and Discussion of the Findings The study sought to analyze the effect of treasury management on the financial performance of commercial banks in Kenya. The independent variables were the various treasury management practices while the dependent variable was the financial performance of the commercial banks. The target population was all the 43 commercial banks in Kenya and the study data was collected for a five-year period 2013 to 2017 on an annual basis. Data collected was analyzed using both descriptive and inferential statistics. Summary of key findings is presented below as per the specific research objectives. 5.2.1 Treasury Management Practices Adopted by Commercial Banks in Kenya The study investigated the extent to which treasury management practices have been adopted by commercial banks in Kenya. The main treasury management strategies adopted by the commercial banks were established to include funding strategies, investment strategies, liquidity management and risk management strategies. The study found out that the most utilized funding strategy was short term funding policy while deposits as a source of short term funding was the least. The study also found that none of the investment strategies put in place by the commercial banks had an above average level of adoption indicating that the banks still had imminent gaps on how they 59 undertook their investments. The study also found that most aspects of liquidity management were still lagging behind in the commercial banks with only moderate extents of adoption and that the commercial banks were yet to be successful in proper implementation of all their risk management strategies. This tends to coincide to a study conducted in China and Malaysia that established the same findings (Said & Tumin, 2011). The findings were in line with Kathomi, Kimani, and Kariuki, (2017) who established that though properly implemented financial risk management measures positively impacted the sustainability of financial institutions, most commercial banks fail to properly execute them hence end up underperforming. Similarly, Osano, (2013) found that most of these investment strategies were only adopted to a relatively small extent. While on the contrary, Li and Zou, (2014) found a large extent of implementation of the treasury management strategies on their study undertaken on commercial banks in Europe between the period of 2007 and 2012. Another study done by Mahjabeen, (2010) found out that financial institutions with better treasury management would be sustainable. 5.2.2 Effect of Treasury Management Practices on the Financial Performance of Commercial Banks in Kenya The study further sought to establish the effect various forms of treasury management practices on financial performance of commercial banks based on the secondary data collected. Panel data was used where analysis was first conducted on all commercial banks combined followed by small banks, medium banks and large commercial banks. The findings indicated that combined, treasury management practices had a strong positive effect on financial performance of commercial banks (R2= 0.6757, F(4,151)= 48.4, p<0.05). Funding strategies, investment strategies and liquidity strategies were found to have a positive and 60 significant effect on financial performance of commercial banks in Kenya. Risk management was found to have a negative effect on financial performance of commercial banks in Kenya. Results of panel data using bank size revealed that significance of treasury management practices on financial performance was dependent on size of commercial banks. The effect of treasury management was found to be the greatest among medium sized banks (R2=0.7539), followed by small banks (R2= 59%), and least among large commercial banks (R2= 0.0042). This would mean that effect of treasury management on financial performance of commercial banks have an optimal level after which the effect would start dwindling. Large commercial banks are also usually diversified and have attained their size through an aggressive growth strategy often obtained at the expense of margins and profitability, management of large deposits also attracts huge costs in terms of expertise therefore impacting the overall financial performance. These findings concur with those of Graham and Bordeleau, (2010) who studied the importance of liquidity management is ensuring the continuous maximization of shareholders’ capital. The results on the test of significance on the other hand revealed that the models were significant only for the medium and large commercial banks showing that the treasury management practices were only good predictors of variations in performance of the two bank tiers. Further, among small banks investment, liquidity and risk management strategies had a significant effect on commercial banks financial performance. Among medium banks, only funding strategies had significant effect on financial performance. Among large commercial banks, funding and risk management had significant effect on financial performance of commercial banks. This meant that treasury management strategies that have effect of financial performance vary with size of the bank. 61 These findings were related to those by Bassey, (2017) found that there was a significant relationship between liquidity management and the performance of large deposit money banks in Nigeria. Kathomi, Kimani, and Kariuki, (2017) established that properly implemented financial risk management measures positively impacted the sustainability of large financial institutions. Also, this is supported by Kargi, (2011) who investigated effect of treasury control and budgeting control on the profitability of Nigerian manufacturing companies and revealed that money control and cash budgeting had fine and non-large courting with profitability. This however tends to contradict Ibrahim, (2017) who conducted a study on the impact of liquidity on the profitability of Iraqi commercial banks measured by current ratio regardless the size of the commercial banks. 5.2.3 Perceived Effect of Treasury Management on Financial Performance of Commercial Banks in Kenya The study also sought to examine the perceived effect of treasury management on financial performance of commercial banks in Kenya from the primary data. To achieve this, regression analysis was computed whereby treasury management practices studied were perceived to explain 70.3% of the variations in performance (R2=0.703). This implies that only 29.7% of the variation in the performance at the commercial banks were perceived by the respondents to be explained by factors other than those investigated by the study. The same perceived positive relationship was established by several studies conducted (Graham & Bordeleau, 2010; Dang 2011; Macharia, 2013). The model was found to be valid meaning that the treasury management practices were perceived to be good predictors of variations in financial performance and were able to predict changes in the performance at any particular time. All the variables except Liquidity Strategies, have a p- 62 value less than 5% (P < 0.05) meaning that, when all variables in this study when combined are significant in explaining the variations in financial performance of the commercial banks. The reviewed theories namely; risk management theory and liquidity preference Theory also indicated the need for incorporating treasury management in commercial banks. The positive perceived relationship tends to concur with studies conducted such as Demirgüç-Kunt and Huizinga, (2009) found that bank activity and funding strategies impacted on risk and returns. The findings are also consistent with Sang, (2014) who focused on commercial banks in Nakuru and also established a similar positive effect. Gakure et.al, (2012) who investigated how credit management techniques affected the banks performance and indicated that credit risk management techniques had a positive effect on the banks performance Collier, (2004) and Wanjohi, (2013) also found that proper financial risk management positively and significantly influenced the financial performance of organizations and improved returns in the banking sector respectively. Ironkwe and Muenee, (2016) exploring treasury management revealed a positive correlation exists between treasury management and bank performance of large and medium banks. Felix and Claundine, (2008) and Al-Khouri, (2011) also established in their respective studies that proper management of liquidity risk, capital risk and credit risks positively influenced large bank’s profitability and overall performance. While Txomin, (2011) found out that treasury management does not necessarily targeting to improve financial performance but to maintain commercial banks financial soundness, liquidity, prevention of bank panic and consequently bank collapse. However, Konadu, (2009) in a study in Ghana concluded that there was a negative perceived relationship between the treasury management practices and financial performance in the Ghana 63 banking sector. While Nyabicha, (2017) found a statistically non-significant perceived relationship between financial risk management and bank performance in Kenya. 5.3 Conclusion The study found that four main treasury management practices adopted by commercial banks include funding, investment, liquidity management and risk management strategies. However, the study found that most of these treasury management practices were still underutilized having moderate to low levels of adoption by the commercial banks. The study thus concludes that the efficiency of treasury management will be based on the efficiency in formulation and implementation of these strategies by the commercial banks, which are yet to fully integrate them among their core functions hence the low implementation levels which need to be improved. The study found that treasury management practices have strong positive effect on financial performance of commercial banks. The effect of treasury management is greatest among medium sized banks, followed by small banks and least among large commercial banks. Among small banks investment, liquidity and risk management strategies has significant effect on commercial banks financial performance. Among medium banks, only funding strategies has significant effect on financial performance. Among large commercial banks, funding and risk management has significant effect on financial performance of commercial banks. The study therefore concluded that the level of significance of the strategies is dependent on the size of the commercial bank. The study further found that the treasury management practices studied were perceived to explain a huge portion of the financial performance of the commercial banks and also found that all variables except Liquidity Strategies were significant in explaining the variations in financial performance of the commercial banks. The study thus makes the conclusion that the current 64 financial performance of the commercial banks is largely determined by the treasury management practices adopted and improvement in the level of implementation of the treasury management practices will translate in enhanced financial performance of the commercial banks. Consequently, the study concludes that Funding, Investment, Liquidity Management and Risk Management Strategies are main determinants of financial performance, however the level and extent of the effect will vary based on the strategy. 5.4 Recommendations 5.4.1 Recommendation for Policy Adoption of treasury management practices that are in line with the bank size was found to be crucial in enhancing commercial banks financial performance. The study recommends for adoption of appropriate policy environment by commercial banks, government and other regulatory bodies such as the CBK pertaining to the adoption of treasury management practices by the commercial banks. The study also recommends that the government should put in place appropriate policies that favor the implementation of these practices among the commercial banks but also other financial institution. The central bank is also recommended to look into the treasury management practices of commercial banks and evaluate whether there is need to improve or increase these practices as there has been cases of banks collapsing despite the regular treasury management hence adversely affected by financial risks. 5.4.2 Recommendation for Practice Treasury management was found to improve financial performance of commercial banks. As the bank size increases from small to medium to large, the important treasury management practices continued to vary. The study therefore recommends that management of commercial banks to 65 assess and ensure the treasury management practices in place and are in line with the size of their institutions with a target to increasing the financial performance. The study recommends that the management of the banks should institute appropriate internal mechanisms to ensure that there is constant review of the current treasury management practices with the expected earnings and wealth maximization objectives of the organizations. The study also recommends that the bank managers should prioritize these strategies in arriving at key bank decisions, ensure there is proper budget allocation to the practices, internal controls, timeliness of releasing funds securing adequate funding, effective plan on allocation of funds and effective approval of funds which will act to improve the efficiency of the practices. 5.5 Limitations to the Study There were several limitations which the researcher was faced with during the study which had to be managed to deliver credible findings. On the questionnaire data collection, some of the respondents were reluctant or unwilling to participate in the study. This was in line with the policies of some commercial banks who restricted their members of staff from providing information before seeking approvals. Other respondents sighted tight schedules. This delayed data collection process and the researcher had to obtain permissions from all relevant bodies. Secondary data collection was also limited to the differing reporting formats by the commercial banks. The format of disclosure of various banks was different on the items being sought by the study. Numerous banks were acquired, changed their names, temporarily closed their operations and merged over the study period. This affected the ease in compiling secondary data required for analysis. 66 5.6 Areas for Further Research Despite the research questions being well answered, several areas remain unclear and require further research. The study was limited only to treasury management of commercial banks which may not be an actual representation of financial institutions and organizations in other sectors which have adopted treasury management. The study thus suggests that further research should be conducted in other financial institutions such as SACCOs, Deposit Taking Banks and other organizations and the results. The study only focused on four treasury management practices, therefore suggests further research should be done, taking into consideration other practices and also investigating the various challenges that may occur during the implementation process. Additionally, further studies are suggested at different time frames so as determine whether the prevailing treasury management practices would have changed or improved. 67 REFERENCES ACT (2017). Essentials of Treasury Management. Association of Corporate Treasurers; USA Ahlin, C. & Townsend, R. (2007). 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An institutional theory perspective of business continuity planning for purchasing and supply management. International journal of production research, 43(16), 3401-3420. 75 APPENDICES Appendix I: Letter of Introduction 76 Appendix II: Questionnaire Thank you for accepting to participate in this survey. The questionnaire will take approximately 10-15 minutes to complete. This questionnaire is designed to collect information on the EFFECT OF TREASURY MANAGEMENT ON THE FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN KENYA. The information obtained will only be used for academic purposes and shall remain confidential. No names or any identifying information will be used in the data analysis. Please provide honest and candid answers. Please tick or write in the spaces provided. SECTION A: GENERAL INFORMATION 1. Please indicate your current position in the commercial bank a) Top Management [ ] b) Middle Level Management [ ] c) Employee [ ] 2. Please indicate your number of years in service to the bank a) Less than 5 years [ ] b) 5 – 10 years [ ] c) 10 – 15 years [ ] d) 15 – 20 years [ ] e) Over 20 years [ ] 77 SECTION B: TREASURY MANAGEMENT PRACTICES ADOPTED BY THE COMMERCIAL BANKS Treasury Management Practices This section seeks to determine the treasury management practices used by commercial banks. Please rate the following using a Likert Scale of 1–5 where 1 is very small extent, 2 is small extent, 3 is moderate extent, 4 is large extent and 5 is to a very large extent. 3. Funding Strategies Statement 1 2 3 4 5 The bank has short term funding policy that guides treasury There is a list of approved sources of short term funds The bank mainly uses deposits as a source of short term funding Short term funding is done mainly to protect banks liquidity as opposed to financial performance 4. Which other short term funding strategies have been adopted by your bank? ………………………………………………………………………………………………… ………………………………………………………………………………………………… 5. Investment Strategies Statement 1 2 3 4 5 The bank has a short term investment policy that guides treasury There is a list of approved investment instruments that can be used The bank mainly invests in treasury bills/bonds 78 Statement 1 2 3 4 5 Short term investments are done mainly in consideration of banks liquidity as opposed to financial performance 6. Which other short term investment strategies have been adopted by your bank? ……………………………………………………………………………………………………… ……………………………………………………………………………………………………… 7. Liquidity Strategies Statement 1 2 3 4 5 There is a clear policy guideline used by the commercial bank The bank had adopted liquidity projection systems to protect against insolvency Liquidity management is the main function of treasury 8. Which other liquidity strategies have been adopted by your bank? ……………………………………………………………………………………………………… ……………………………………………………………………………………………………… 9. Risk Management Statement 1 2 3 4 5 There are practices and procedures through which risk management strategies are implemented The bank has mechanisms of managing foreign exchange risk There is frequent risk management review by the bank 79 Statement 1 2 3 4 5 There is control risk self-assessment measures implemented by the bank There are sound credit management practices The bank constantly undertakes financial operating risk management The bank has an effective process of developing and implementing risk response strategies There is continuous reporting of risks to all relevant structures The bank monitors the risk performance on an ongoing basis The bank has an effective process of resourcing risk management response strategies and processes Are there any other treasury management practices adopted by your bank that influence its financial performance? ……………………………………………………………………………………………………… ……………………………………………………………………………………………………… SECTION C: FINANCIAL PERFORMANCE OF THE COMMERCIAL BANKS 10. Please rate the extent to which treasury management has helped to improve the following measures of financial performance at your organization using a scale of 1 to 5 where 1 is very small extent, 2 is small extent, 3 is moderate extent, 4 is large extent and 5 is to a very large extent. 80 Statement 1 2 3 4 5 Treasury management improves return on capital employed Treasury management leads to increased return on assets Treasury management increases Return on Investment Treasury management improves operating profit margin 11. To what gradation do you attribute the current financial performance of your bank to the treasury management practices employed a) Very large extent [ ] b) Large extent [ ] c) Moderate extent [ ] d) Small extent [ ] e) Very Small extent [ ] 12. Which measures can you suggest to improve the financial performance of commercial banks? ……………………………………………………………………………………………………… ……………………………………………………………………………………………………… ……………………………………………………………………………………………………… End Thank you for your time 81 Appendix III: List of commercial banks in Kenya No. Bank Name Tier 1 KCB Bank Kenya Ltd Large 2 Standard Chartered Bank (K) Ltd Large 3 Equity Bank Kenya Ltd Large 4 Barclays Bank of Kenya Ltd Large 5 Co – operative Bank of Kenya Ltd Large 6 Commercial Bank of Africa Ltd Large 7 Diamond Trust Bank (K) Ltd Medium 8 NIC Bank PLC Medium 9 Stanbic Bank Kenya Ltd Medium 10 I & M Bank Ltd Medium 11 National Bank of Kenya Ltd Medium 12 Chase Bank Ltd** Medium 13 Citibank N.A. Kenya Medium 14 Bank of Baroda Ltd Medium 15 Family Bank Ltd Medium 16 Bank of Africa Kenya Ltd Medium 17 Prime Bank Ltd Medium 18 Ecobank Kenya Ltd Medium 19 HFC Ltd Medium 20 Imperial Bank Ltd** Medium 21 Bank of India Medium 82 22 Gulf African Bank Ltd Small 23 African Banking Corporation Ltd Small 24 Guaranty Trust Bank (Kenya) Ltd Small 25 Mayfair Bank Ltd Small 26 Sidian Bank Ltd Small 27 Victoria Commercial Bank Ltd Small 28 SBM Bank (Kenya) Ltd Small 29 Jamii Bora Bank Ltd Small 30 Development Bank of Kenya Ltd Small 31 Spire Bank Ltd Small 32 DIB Bank Kenya Ltd Small 33 Guardian Bank Ltd Small 34 First Community Bank Small 35 Consolidated Bank of Kenya Ltd Small 36 Transnational Bank Ltd Small 37 Paramount Bank Ltd Small 38 Habib Bank A.G. Zurich Small 39 M-oriental Commercial Bank Ltd Small 40 Middle East Bank (K) Ltd Small 41 Credit Bank Ltd Small 42 Charterhouse Bank Ltd Small 43 UBA Kenya Bank Ltd Small 83 Appendix IV: Reliability Analysis No Measure Scale Mean if Item Deleted Scale Variance if Item Deleted Corrected Item-Total Correlation Cronbach's Alpha if Item Deleted 1 The bank has short term funding policy that guides treasury 89.79 332.378 0.802 0.909 2 There is a list of approved sources of short term funds 90.13 346.273 0.712 0.912 3 The bank mainly uses deposits as a source of short term funding 91.08 349.968 0.526 0.915 4 Short term funding is done mainly to protect banks liquidity as opposed to financial performance 90.74 360.617 0.387 0.917 5 The bank has a short term investment policy that guides treasury 91 358.737 0.39 0.917 6 There is a list of approved investment instruments that can be used 90.49 349.52 0.606 0.913 7 The bank mainly invests in treasury bills/bonds 90.51 343.204 0.613 0.913 8 Short term investments are done mainly in consideration of banks liquidity as opposed to financial performance 90.31 348.745 0.537 0.914 9 There is a clear policy guideline used by the commercial bank 90.05 346.997 0.758 0.911 10 The bank had adopted liquidity projection systems to protect against insolvency 90.44 341.937 0.729 0.911 11 There is a minimum liquidity ratio a commercial bank must have 90.38 349.822 0.643 0.913 12 Liquidity management is the main function of treasury 89.92 376.283 0.023 0.921 13 There are practices and procedures through which risk management strategies are implemented 90.28 342.682 0.567 0.914 14 The bank has mechanisms of managing foreign exchange risk 90.44 356.252 0.474 0.915 15 The bank has a policy for insuring cash 90.46 354.202 0.459 0.916 16 There is frequent risk management review by the bank 89.33 364.649 0.413 0.916 17 There is control risk self-assessment measures implemented by the bank 89.26 363.511 0.419 0.916 84 No Measure Scale Mean if Item Deleted Scale Variance if Item Deleted Corrected Item-Total Correlation Cronbach's Alpha if Item Deleted 18 There are sound credit management practices 89.87 340.167 0.787 0.91 19 The bank constantly undertakes financial operating risk management 90.36 354.131 0.42 0.916 20 The bank has an effective process of developing and implementing risk response strategies 90.64 357.762 0.356 0.918 21 There is continuous reporting of risks to all relevant structures 90.18 353.993 0.384 0.917 22 The bank monitors the risk performance on an ongoing basis 90.64 354.447 0.385 0.917 23 The bank has an effective process of resourcing risk management response strategies and processes 90.18 355.783 0.362 0.918 24 Treasury management improves return on capital employed 89.44 363.41 0.46 0.916 25 Treasury management leads to increased return on assets 89.69 349.903 0.672 0.913 26 Treasury management increases Return on Investment 90 358.053 0.475 0.915 27 Treasury management improves operating profit margin 89.92 357.704 0.528 0.915 28 To what gradation do you attribute the current financial performance of your bank to the treasury management practices employed 90 352.579 0.614 0.913 85 Appendix V: Tests and Descriptive Statistics Construct Min Max Mean Std. Dev Skewness Kurtosis Please indicate your current position in the commercial bank 1 3 1.9 0.598 0.029 0.378 -0.064 0.741 Please indicate your number of years in service to the bank 2 5 3.44 0.995 0.017 0.378 -0.995 0.741 The bank has short term funding policy that guides treasury 1 5 3.74 1.499 -0.721 0.378 -1.129 0.741 There is a list of approved sources of short term funds 1 5 3.41 1.163 -0.669 0.378 -0.505 0.741 The bank mainly uses deposits as a source of short term funding 1 5 2.46 1.354 0.555 0.378 -1.131 0.741 Short term funding is done mainly to protect banks liquidity as opposed to financial performance 1 5 2.79 1.128 0.195 0.378 -1.007 0.741 The bank has a short term investment policy that guides treasury 1 5 2.54 1.232 0.796 0.378 -0.128 0.741 There is a list of approved investment instruments that can be used 1 5 3.05 1.213 0.177 0.378 -1.304 0.741 The bank mainly invests in treasury bills/bonds 1 5 3.03 1.46 -0.154 0.378 -1.389 0.741 Short term investments are done mainly in consideration of banks liquidity as opposed to financial performance 1 5 3.23 1.385 -0.438 0.378 -1.291 0.741 There is a clear policy guideline used by the commercial bank 2 5 3.49 1.073 -0.302 0.378 -1.236 0.741 The bank had adopted liquidity projection systems to protect against insolvency 1 5 3.1 1.294 -0.123 0.378 -1.096 0.741 There is a minimum liquidity ratio a commercial bank must have 1 5 3.15 1.136 -0.544 0.378 -0.8 0.741 Liquidity management is the main function of treasury 1 5 3.62 1.091 -0.952 0.378 0.172 0.741 There are practices and procedures through which risk management strategies are implemented 1 5 3.26 1.585 -0.488 0.378 -1.376 0.741 The bank has mechanisms of managing foreign exchange risk 1 5 3.1 1.165 -0.63 0.378 -0.586 0.741 86 The bank has a policy for insuring cash 1 5 3.08 1.306 0 0.378 -1.314 0.741 There is frequent risk management review by the bank 1 5 4.21 0.833 -1.563 0.378 4.434 0.741 There is control risk self- assessment measures implemented by the bank 1 5 4.28 0.887 -1.557 0.378 3.453 0.741 There are sound credit management practices 1 5 3.67 1.264 -0.975 0.378 -0.041 0.741 The bank constantly undertakes financial operating risk management 1 5 3.18 1.412 -0.513 0.378 -1.083 0.741 The bank has an effective process of developing and implementing risk response strategies 1 5 2.9 1.392 0.131 0.378 -1.16 0.741 There is continuous reporting of risks to all relevant structures 1 5 3.36 1.53 -0.555 0.378 -1.187 0.741 The bank monitors the risk performance on an ongoing basis 1 5 2.9 1.501 0.036 0.378 -1.367 0.741 The bank has an effective process of resourcing risk management response strategies and processes 1 5 3.36 1.495 -0.409 0.378 -1.265 0.741 Treasury management improves return on capital employed 2 5 4.1 0.821 -1.1 0.378 1.462 0.741 Treasury management leads to increased return on assets 2 5 3.85 1.089 -0.71 0.378 -0.728 0.741 Treasury management increases Return on Investment 1 5 3.54 1.072 -0.847 0.378 0.031 0.741 Treasury management improves operating profit margin 2 5 3.62 0.99 -0.681 0.378 -0.669 0.741 To what gradation do you attribute the current financial performance of your bank to the treasury management practices employed 2 5 3.54 1.072 -0.443 0.378 -1.152 0.741 87 Appendix VI: Granular Panel Data Analysis Results Customer Deposits Long Term Borrowings F test that all u_i=0: F(46, 150) = 9.75 Prob > F = 0.0000 rho .68837575 (fraction of variance due to u_i) sigma_e .03209322 sigma_u .04769912 _cons .4553744 .0183831 24.77 0.000 .4190511 .4916976 2017 -.0013462 .0074263 -0.18 0.856 -.0160199 .0133276 2016 .0010405 .0072861 0.14 0.887 -.0133562 .0154371 2015 -.0032126 .0072027 -0.45 0.656 -.0174445 .0110193 2014 .0050929 .0070042 0.73 0.468 -.0087468 .0189325 Year Customer_D~s .0547604 .0064362 8.51 0.000 .0420431 .0674776 Financial_~e Coef. Std. Err. t P>|t| [95% Conf. Interval] corr(u_i, Xb) = 0.1653 Prob > F = 0.0000 F(5,150) = 14.76 overall = 0.4745 max = 5 between = 0.4881 avg = 4.3 R-sq: within = 0.3297 Obs per group: min = 1 Group variable: Bank Number of groups = 47 Fixed-effects (within) regression Number of obs = 202 . xtreg Financial_Performance Customer_Deposits i.Year, fe F test that all u_i=0: F(46, 150) = 7.95 Prob > F = 0.0000 rho .69815935 (fraction of variance due to u_i) sigma_e .0371031 sigma_u .05642851 _cons .5631397 .0120384 46.78 0.000 .5393529 .5869265 2017 .0007676 .0085803 0.09 0.929 -.0161862 .0177214 2016 .0016875 .008423 0.20 0.841 -.0149556 .0183306 2015 -.0026018 .0083313 -0.31 0.755 -.0190636 .0138599 2014 .0061541 .0081118 0.76 0.449 -.0098741 .0221822 Year Long_term_~s .0227992 .005632 4.05 0.000 .0116709 .0339274 Financial_~e Coef. Std. Err. t P>|t| [95% Conf. Interval] corr(u_i, Xb) = 0.5138 Prob > F = 0.0052 F(5,150) = 3.49 overall = 0.3910 max = 5 between = 0.5838 avg = 4.3 R-sq: within = 0.1041 Obs per group: min = 1 Group variable: Bank Number of groups = 47 Fixed-effects (within) regression Number of obs = 202 . xtreg Financial_Performance Long_term_borrowings i.Year, fe 88 Short Term Deposits Advanced Current Ratio F test that all u_i=0: F(46, 150) = 10.96 Prob > F = 0.0000 rho .73095562 (fraction of variance due to u_i) sigma_e .03282359 sigma_u .05410278 _cons .558327 .0078974 70.70 0.000 .5427224 .5739315 2017 -.0030442 .0076134 -0.40 0.690 -.0180877 .0119992 2016 -.0055848 .007516 -0.74 0.459 -.0204357 .0092662 2015 -.0113641 .0074298 -1.53 0.128 -.0260447 .0033165 2014 .0016917 .0071694 0.24 0.814 -.0124744 .0158577 Year Short_Term~d .0417184 .0052727 7.91 0.000 .0313001 .0521367 Financial_~e Coef. Std. Err. t P>|t| [95% Conf. Interval] corr(u_i, Xb) = -0.1539 Prob > F = 0.0000 F(5,150) = 12.79 overall = 0.3991 max = 5 between = 0.3718 avg = 4.3 R-sq: within = 0.2989 Obs per group: min = 1 Group variable: Bank Number of groups = 47 Fixed-effects (within) regression Number of obs = 202 . xtreg Financial_Performance Short_Term_Deposits_advanced i.Year, fe F test that all u_i=0: F(46, 150) = 4.13 Prob > F = 0.0000 rho .50297022 (fraction of variance due to u_i) sigma_e .02685831 sigma_u .02701834 _cons 1.915485 .1012689 18.91 0.000 1.715387 2.115583 2017 -.0025175 .0062156 -0.41 0.686 -.014799 .009764 2016 .0025414 .0060965 0.42 0.677 -.0095047 .0145875 2015 -.0084198 .0060387 -1.39 0.165 -.0203517 .003512 2014 -.0003229 .0058711 -0.05 0.956 -.0119237 .0112778 Year Current_Ra~o -1.167409 .0901939 -12.94 0.000 -1.345624 -.9891942 Financial_~e Coef. Std. Err. t P>|t| [95% Conf. Interval] corr(u_i, Xb) = 0.3075 Prob > F = 0.0000 F(5,150) = 33.90 overall = 0.7909 max = 5 between = 0.8524 avg = 4.3 R-sq: within = 0.5306 Obs per group: min = 1 Group variable: Bank Number of groups = 47 Fixed-effects (within) regression Number of obs = 202 . xtreg Financial_Performance Current_Ratio i.Year, fe 89 Forex Gain Loss Interest Expense F test that all u_i=0: F(46, 150) = 12.46 Prob > F = 0.0000 rho .78796363 (fraction of variance due to u_i) sigma_e .03898096 sigma_u .07514506 _cons .6118245 .0092231 66.34 0.000 .5936005 .6300486 2017 .0018889 .0090286 0.21 0.835 -.0159508 .0197285 2016 .0014389 .0088982 0.16 0.872 -.016143 .0190208 2015 -.0041588 .0087644 -0.47 0.636 -.0214764 .0131588 2014 .0038175 .0085147 0.45 0.655 -.0130067 .0206417 Year Forex_gain~s -.0716303 .0831132 -0.86 0.390 -.2358541 .0925936 Financial_~e Coef. Std. Err. t P>|t| [95% Conf. Interval] corr(u_i, Xb) = -0.5350 Prob > F = 0.8892 F(5,150) = 0.34 overall = 0.0591 max = 5 between = 0.0766 avg = 4.3 R-sq: within = 0.0111 Obs per group: min = 1 Group variable: Bank Number of groups = 47 Fixed-effects (within) regression Number of obs = 202 . xtreg Financial_Performance Forex_gain_loss i.Year, fe F test that all u_i=0: F(46, 150) = 13.09 Prob > F = 0.0000 rho .7404231 (fraction of variance due to u_i) sigma_e .03864249 sigma_u .06526376 _cons .6106762 .006579 92.82 0.000 .5976768 .6236757 2017 .0019498 .00893 0.22 0.827 -.015695 .0195945 2016 .0023043 .0087713 0.26 0.793 -.0150271 .0196356 2015 -.0038911 .0086729 -0.45 0.654 -.021028 .0132458 2014 .0037625 .008435 0.45 0.656 -.0129042 .0204293 Year Interest_e~e -.0013424 .0007286 -1.84 0.067 -.002782 .0000972 Financial_~e Coef. Std. Err. t P>|t| [95% Conf. Interval] corr(u_i, Xb) = 0.0950 Prob > F = 0.5016 F(5,150) = 0.87 overall = 0.0411 max = 5 between = 0.0388 avg = 4.3 R-sq: within = 0.0282 Obs per group: min = 1 Group variable: Bank Number of groups = 47 Fixed-effects (within) regression Number of obs = 202 . xtreg Financial_Performance Interest_expense i.Year, fe 90 Non-performing Loans Risk Management F test that all u_i=0: F(46, 150) = 12.53 Prob > F = 0.0000 rho .75009125 (fraction of variance due to u_i) sigma_e .038935 sigma_u .06745381 _cons .6102268 .0073748 82.74 0.000 .5956548 .6247988 2017 .0036064 .0090587 0.40 0.691 -.0142927 .0215055 2016 .0041922 .0090296 0.46 0.643 -.0136495 .0220339 2015 -.0032033 .0087508 -0.37 0.715 -.0204942 .0140875 2014 .0044263 .0085006 0.52 0.603 -.0123702 .0212227 Year Non_perfor~s -.0232797 .0222081 -1.05 0.296 -.0671609 .0206014 Financial_~e Coef. Std. Err. t P>|t| [95% Conf. Interval] corr(u_i, Xb) = -0.2737 Prob > F = 0.8415 F(5,150) = 0.41 overall = 0.0345 max = 5 between = 0.1581 avg = 4.3 R-sq: within = 0.0135 Obs per group: min = 1 Group variable: Bank Number of groups = 47 Fixed-effects (within) regression Number of obs = 202 . xtreg Financial_Performance Non_performing_loans i.Year, fe F test that all u_i=0: F(46, 154) = 13.51 Prob > F = 0.0000 rho .74532698 (fraction of variance due to u_i) sigma_e .0382353 sigma_u .06541035 _cons .6120691 .003803 160.95 0.000 .6045564 .6195818 Risk_Manag~s -.0041327 .0021589 -1.91 0.057 -.0083976 .0001323 Financial_~e Coef. Std. Err. t P>|t| [95% Conf. Interval] corr(u_i, Xb) = 0.0766 Prob > F = 0.0574 F(1,154) = 3.66 overall = 0.0339 max = 5 between = 0.0305 avg = 4.3 R-sq: within = 0.0232 Obs per group: min = 1 Group variable: Bank Number of groups = 47 Fixed-effects (within) regression Number of obs = 202 91 Liquidity Strategies Investment Strategies F test that all u_i=0: F(46, 154) = 15.68 Prob > F = 0.0000 rho .76767371 (fraction of variance due to u_i) sigma_e .03426595 sigma_u .06228765 _cons .4370318 .0262305 16.66 0.000 .3852136 .4888499 Liquidity_~s .0845555 .0129997 6.50 0.000 .0588747 .1102362 Financial_~e Coef. Std. Err. t P>|t| [95% Conf. Interval] corr(u_i, Xb) = -0.0556 Prob > F = 0.0000 F(1,154) = 42.31 overall = 0.1242 max = 5 between = 0.1214 avg = 4.3 R-sq: within = 0.2155 Obs per group: min = 1 Group variable: Bank Number of groups = 47 Fixed-effects (within) regression Number of obs = 202 F test that all u_i=0: F(46, 154) = 9.63 Prob > F = 0.0000 rho .69813808 (fraction of variance due to u_i) sigma_e .02826475 sigma_u .04298448 _cons .5209509 .0076748 67.88 0.000 .5057895 .5361123 Investment~s .0664953 .0057333 11.60 0.000 .0551693 .0778213 Financial_~e Coef. Std. Err. t P>|t| [95% Conf. Interval] corr(u_i, Xb) = -0.1038 Prob > F = 0.0000 F(1,154) = 134.52 overall = 0.5936 max = 5 between = 0.5913 avg = 4.3 R-sq: within = 0.4662 Obs per group: min = 1 Group variable: Bank Number of groups = 47 Fixed-effects (within) regression Number of obs = 202 92 Funding Strategies F test that all u_i=0: F(46, 154) = 7.04 Prob > F = 0.0000 rho .64151297 (fraction of variance due to u_i) sigma_e .03247238 sigma_u .04343904 _cons .4732546 .0167881 28.19 0.000 .4400898 .5064193 Funding_St~s .0577895 .0071905 8.04 0.000 .0435847 .0719943 Financial_~e Coef. Std. Err. t P>|t| [95% Conf. Interval] corr(u_i, Xb) = 0.3973 Prob > F = 0.0000 F(1,154) = 64.59 overall = 0.5703 max = 5 between = 0.6353 avg = 4.3 R-sq: within = 0.2955 Obs per group: min = 1 Group variable: Bank Number of groups = 47 Fixed-effects (within) regression Number of obs = 202 93 Appendix VI: Factor Analysis Communalities Initial Extraction Customer_Deposits 1 0.94 Long_term_borrowings 1 0.6 Short_Term_Deposits_advanced 1 0.666 Cash and Cash Equivalent 1 0.857 Current Ratio 1 0.839 Forex_gain_loss 1 0.678 Interest_expense 1 0.834 Non_performing_loans 1 0.574 Extraction Method: Principal Component Analysis. Initial Eigenvalues Extraction Sums of Squared Loadings Rotation Sums of Squared Loadings Component Total % of Variance Cumulative % Total % of Variance Cumulative % Total % of Variance Cumulative % 1 4.031 44.787 44.787 4.031 44.787 44.787 3.814 42.382 42.382 2 1.678 18.646 63.433 1.678 18.646 63.433 1.886 20.957 63.339 3 1.128 12.537 75.971 1.128 12.537 75.971 1.137 12.632 75.971 4 0.827 9.191 85.162 5 0.632 7.02 92.181 6 0.303 3.366 95.547 7 0.253 2.812 98.359 8 0.1 1.116 99.475 9 0.047 0.525 100 Extraction Method: Principal Component Analysis. Component Matrix(a) Component 1 2 3 Customer_Deposits 0.862 0.443 0.004 Long_term_borrowings 0.754 -0.145 -0.104 Short_Term_Deposits_advanced 0.727 -0.216 0.301 Cash and Cash Equivalent 0.636 0.672 -0.022 Current Ratio -0.871 0.25 0.135 Forex_gain_loss 0.325 -0.04 -0.755 Interest_expense -0.055 0.894 0.177 Non_performing_loans 0.334 -0.24 0.636 Extraction Method: Principal Component Analysis. a. 3 components extracted. Rotated Component Matrix(a) Component 1 2 3 Customer_Deposits 0.687 0.681 -0.068 Long_term_borrowings 0.762 0.078 -0.113 Short_Term_Deposits_advanced 0.758 0.047 0.299 94 Cash and Cash Equivalent 0.402 0.826 -0.11 Current Ratio -0.906 -0.011 0.136 Forex_gain_loss 0.323 -0.02 -0.757 Interest_expense -0.324 0.849 0.087 Non_performing_loans 0.391 -0.059 0.647 Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization. a. Rotation converged in 5 iterations. Component Transformation Matrix Component 1 2 3 1 0.953 0.302 -0.031 2 -0.303 0.947 -0.101 3 0 0.106 0.994 Extraction Method: Principal Component Analysis. Rotation Method: Varimax with Kaiser Normalization. Custom er_Dep osits Long_ter m_borro wings Short_Term_ Deposits_adv anced Cas h and Cas h Equ ival ent Cu rre nt Ra tio Forex _gain_ loss Interes t_expe nse Non_perf orming_l oans Customer_D eposits 1 0.517 0.545 0.83 8 - 0.6 33 0.293 0.32 0.215 Long_term_b orrowings 0.517 1 0.382 0.42 6 - 0.5 89 0.286 -0.193 0.295 Short_Term_ Deposits_adv anced 0.545 0.382 1 0.23 4 - 0.6 62 0.052 -0.123 0.33 Cash and Cash Equivalent 0.838 0.426 0.234 1 - 0.3 37 0.095 0.422 -0.009 Current Ratio -0.633 -0.589 -0.662 - 0.33 7 1 -0.329 0.243 -0.177 Forex_gain_l oss 0.293 0.286 0.052 0.09 5 - 0.3 29 1 -0.072 -0.047 Interest_expe nse 0.32 -0.193 -0.123 0.42 2 0.2 43 -0.072 1 -0.048 95 Non_perform ing_loans 0.215 0.295 0.33 - 0.00 9 - 0.1 77 -0.047 -0.048 1