The Effect of Liquidity Risk Management on Financial Performance of Commercial Banks in Tanzania.

Msuku, Chiito Charles (2020) The Effect of Liquidity Risk Management on Financial Performance of Commercial Banks in Tanzania. Masters thesis, The Open University of Tanzania.

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Abstract

The study assessed the effect of liquidity risk management on financial performance of commercial banks in Tanzania. The study was guided by three research objectives namely: to identify the factors influencing liquidity risks in the commercial banks, to establish relationship between liquidity risk and financial performance, as well as to examine the approaches that the banks use to manage the cash deposit in Tanzania. The study employed descriptive research design whereas simple random sampling procedure was employed to select 111 respondents. Data were obtained through, interview, documentary review and questionnaires. The analysis was conducted using descriptive statistics and inferential analysis to describe the existing relationship between study variables. The study found out that all four study independent variables such as liquidity level, capital adequacy, asset quality and inflation rate are all positive and statistically significant on the dependent variable since p<0.05. This is evident also with the testing of each and every hypothesis generating positive results and outcomes respectively. However, the coefficient of determination, R-squared was 0.737 and the adjusted R-squared was 0.726. This shows the reliability of the model, that the independent variables were collectively 72.6% related to the dependent variable Financial Performance whereby the remaining 27.4% of changes was identified by other factors not captured in the model. The study concludes that, liquidity risk management on financial performance of commercial banks in Tanzania has higher influence to the provision of quality services to customers in the commercial banks. The study recommends that, it is important for commercial banks to maintain adequate capital reserves to ensure that they have the ability to fund their liabilities when they are expected to do so.

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