LEVERAGE, LIQUIDITY AND PROFITABILITY OF BANKS AND INSURANCE FIRMS LISTED AT THE NAIROBI SECURITIES EXCHANGE

Abstract

Purpose: Banks and Insurance firms keep the finances of other firms and investors. Therefore the study sought to establish the relationship between leverage and liquidity on profitability and determine the effect of leverage and liquidity on profitability of Banks and Insurance firms listed at the Nairobi Securities Exchange.

Methodology: A census study was done on all the seventeen Banks and Insurance firms listed at the NSE for a six year period beginning the year 2010 to the year 2015. Secondary data was collected from NSE handbooks and individual firms published financial statements for the respective years. Data was analyzed using correlation analysis and General linear models including ANOVA and regression analysis.

Findings: Findings show that a positive relationship exists between leverage and profitability expressed in terms of ROA and a negative relationship exists between leverage and profitability expressed in terms of ROE. Liquidity showed a negative relation with profitability when expressed in terms of ROA whereas a positive insignificant relation exists between liquidity and profitability expressed in terms of ROE.

Implication: The study recommends that managers need to gauge the appropriate leverage and liquidity levels to use for firms given their unique circumstances.

Value: These findings form the basis of argument and support for proposition that liquidity effects on profitability varies when different measures of profitability are applied. Combining leverage and liquidity aspects to determine probable joint effects on profitability brings about opposite observations on firm profits.

Keywords: leverage, liquidity, profitability