CASH FLOW ACTIVITIES AND PROFITABILITY OF COMMERCIAL BANKS IN KENYA
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Abstract
Historically, Kenyan commercial banks have been profitable; however, in recent years, their performance has been inconsistent, as demonstrated by fluctuating pre-tax profits. The purpose of this study was to determine the effect of cash flow activities on the profitability of commercial banks in Kenya. The study specifically examined the effects of cash flow from operating, investing, and financing activities, as well as free cash flow, on profitability. The study was guided by the Free Cash Flow Theory, Baumol’s Model of Cash Management, and the Balanced Scorecard Model. A cross-sectional research design was adopted, and all 38 licensed commercial banks operating in Kenya as of December 2024 were included in the study using a census approach. Secondary data were collected from published financial statements and Central Bank of Kenya reports. Quantitative analysis was conducted using correlation and linear multiple regression models. Results from the regression analysis revealed that operating activities cash flow had the strongest positive and significant effect on profitability (β = 0.458, p = 0.000), followed by free cash flow (β = 0.276, p = 0.001) and financing activities cash flow (β = 0.161, p = 0.013). In contrast, investing activities cash flow had a significant negative effect on profitability (β= –0.237, p = 0.004). The model explained 56.1% of the variation in profitability (R² = 0.561), and the regression was statistically significant (F = 59.279, p = 0.000), indicating that cash flow activities are important determinants of bank performance. The study concludes that efficient management of operational and free cash flows significantly enhances profitability, while heavy or poorly timed investing activities can reduce short- term returns. Banks that effectively manage financing activities also experience improved performance. Based on these findings, it is recommended that commercial banks in Kenya strengthen operational cash collection processes, strategically plan investment outflows, optimize financing strategies, and maintain adequate free cash flow to enhance overall profitability.
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References
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