Mediating Effect of Operational Efficiency on the Relationship between Liquidity Risk Management and Financial Performance of Commercial Banks in Kenya

Abstract

The ability of commercial banks to manage liquidity risk while efficiently managing resources is important for strengthening financial performance. However, managing liquidity risk may involve costs and operational trade-offs that shape the degree to which liquidity risk strategies translate into improved financial outcomes. This study therefore examined the mediating effect of operational efficiency on the relationship between liquidity risk management and financial performance of commercial banks in Kenya. The study was anchored on the Resource-Based View Theory and Shiftability Theory. Underpinned by the positivism research philosophy, the study adopted mixed research design. Secondary data was derived from published audited annual financial statements of 32 licensed commercial banks operating in Kenya, from 2020 to 2024. The mediating effect of operational efficiency was assessed using bootstrap method, indicating no statistically significant mediation effect. The study recommends that commercial banks should manage liquidity risk without relying on improvements in operational efficiency as the transmission mechanism.

Keywords:       Liquidity risk management, Operational Efficiency, Financial Performance, Commercial Banks.