Relationship between Corporate Bonds and Liquidity Growth of Commercial Banks in Nairobi County Kenya

Abstract

As a substitute way of getting funding for proper functional of banking operations, commercial banks issue these bonds to clients. They do this with a promise that the bank will be paying interest after a certain duration of time depending on the type of corporate bond being issued. For the bond market to efficiently develop, conditions such as a developed money market, suitable trading structure, rules and laws that are favorable and realistic macroeconomic policies have to be put into place. However, despite the presence of corporate bonds, growth was limited. This study scrutinized the relationship between corporate bond and liquidity growth of commercial banks in Nairobi County Kenya. The objectives of the study were to determine the influence of fixed-rate bonds, flexible-rate bonds, zero-coupon bonds and convertible bonds on liquidity growth of commercial banks in Nairobi County Kenya. Four theories that were adopted included segmented markets theory, pure expectation theory, liquidity premium theory and preferred habitat theory to steer fixed-rate bonds, floating rate bond, zero-coupon bond and convertible bonds respectively. This research applied descriptive research design when gathering data by closed ended questionnaires on 39 commercial banks in Nairobi County Kenya. Overall operations managers, marketing managers and general managers were the respondents. Census technique was consulted. Pre-testing questionnaires was issued to branch marketing managers, operational managers and assistant managers in simple randomly selected five commercial banks located in Meru county Kenya. SPSS data analysis software was be consulted for quantitatively using the descriptive statistics such as mean, percentage and standard deviation. Tables, graphs and detailed explanations was used to present the final results of the study. The study found out that there was a statistically significant positive relationship between fixed-rate bonds, floating rate bonds, zero-coupon bonds, convertible bonds and liquidity growth of commercial banks in Nairobi. However, the strength of their relationship varied depending on the type of bonds. Zero-coupon bonds proved to have the weakest relationship in the study. It was therefore concluded that between fixed-rate bonds, floating rate bonds, zero-coupon bonds and convertible bonds can dictate the liquidity growth of banks. The study recommended that more types of customized bonds should be issued and public awareness should be raised. The study recommended that policies should be developed by government through the central bank whereby bank customers can obtain bonds more often just like the way mobile loan apps are common. This would promote more market for the bonds. Commercial banks should also indemnify various types of bonds with insurance firms so that any misfortune of events like the recent covid-19 pandemic would have minimal impact on the various types of fixed-rate bonds. The study contributed new knowledge when the relationship between corporate bonds and liquidity growth of commercial banks in Nairobi was established.