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Salome Musau

School of Business, Kenyatta University

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Stephen Muathe

School of Business, Kenyatta University

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Lucy Mwangi

School of Business,Kenyatta University.

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CITATION: Musau, S., Muathe, S., Mwangi, L. (2017) Effect Of Financial Inclusion On Liquidity Risk Of Commercial Banks In Kenya. International Journal of Economics and Finance. Vol. 6 (12) pp 58 – 76.




As a result of the global financial crisis of 2007-2009, policy makers, regulators and financial institutions have put a lot of efforts to reforms aimed at improving financial stability. At the same time there has been global commitment in promoting greater financial inclusion. Consequently, commercial banks have addressed financial inclusion by designing new services and products targeting unbankable customers. There are important trade-offs and synergies between financial inclusion and stability. Poorly implemented financial inclusion policies can impair stability, and also, there may be important synergies brought by broad use of financial services which help financial institutions diversify risk and hence aid stability. Financial stability can enhance financial inclusion through trust build in stable financial systems and hence increase the use of financial services. Excessive emphasis on financial stability can prolong involuntary financial exclusion especially in times of regulatory tightening in an attempt to boost profits and cut off risky segments. It is therefore important for financial institutions to understand the interlinkages in advancing financial inclusion and stability. This study analyzed the effect of financial inclusion on liquidity risk of commercial banks in Kenya. Financial inclusion was measured using three dimensions of bank availability, bank accessibility and bank usage while stability was represented by liquidity risk. The study was anchored on financial intermediation theory supported by finance growth theory and asymmetry information theory. The study used positivism philosophy and the research design was both longitudinal and explanatory non–experimental. The target population was all the 43 commercial banks in Kenya. The study used secondary data collected from CBK annual reports, commercial banks published audited financial statements and annual data from Central Bureau of statistics for the period between 2007-2015. Data was analyzed using descriptive statistics and panel multiple regression analysis. The results obtained found that bank availability had a negative and significant effect on liquidity risk .Bank accessibility was found to have a positive insignificant effect on liquidity risk. Bank usage had a positive significant effect on liquidity risk. From the findings the study concluded that financial inclusion has a significant effect on financial stability of commercial banks in Kenya. The study recommends that commercial banks to formulate policy to ensure they remain stable while accommodating their activities to ensure financial inclusion, hence forming an all inclusive and stable financial sector over time.

Key Words: Financial Inclusion, Unbankable Stability, Synergy, Trade-off, Financial Deepening


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