International Journal of Academic Research in Business and Social Sciences
Vol. 8, No. 9, Sept. 2018,
E-ISSN: 2222-6990
© 2018 HRMARS
695
in times of immense funding pressure as they can withdraw the excess reserves and meet their
commitments and thus avoid overnight borrowing which is highly expensive”. Therefore, the cash
reserves improved bank performance as they acted as a buffer and came handy when the bank
needed funding in a short time.
Summary of Findings
Pearson correlation matrix was obtained to determine the association between cash reserves and
performance; ROA, ROE and NIM. For Equity bank, Cash reserves were found to have a negative and
insignificant relationship with ROA r = -0.03, for ROE a fairly strong and significant positive correlation
with ROE at r = 0.672 and a weak positive correlation with NIM as shown by correlation coefficient of
0.267. For NBK, the cash reserves had a negative, strong and significant correlation coefficient with
ROA, ROE and NIM as indicated by correlation coefficients of -0.767 (p<0.01), -0.756 (p<0.05), and –
0.777(p=<0.01) respectively. Therefore, the study concluded that an increase in cash reserves is
detrimental to profitability as these huge reserves are non-income generating assets.
The study recommended that banks should minimize cash reserves and instead invest this money in
income generating investments that boosts financial performance. Instead of banks holding their
reserves in form of cash, they should hold them in form of near money assets which have a ready
market but have also stability in pricing and also adopt an appropriate cash management model that
minimizes the possibility of running out of cash. This can be achieved by proper forecasting of cash
needs based on past patterns on minimum and maximum cash levels by the bank.
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