Effect of Cash Handling Practices on Financial Performance of Commercial Banks in Kenya

Abstract

Poor cash handling practices by commercial banks leads to massive losses that ultimately leads to a negative performance and in extreme circumstances, closure of the commercial banks. The rising cases of fraud as a result of poor cash handling practices in the Kenyan commercial banks since 2011 have been overwhelming. This is evidenced by recent cases of cash in transit being stolen by security firms contracted to transport the cash. The continuous increase in cases of poor cash handling practices has not made the commercial banks to adopt better and more improved measures to curb the vice of cash fraud. If so, the financial sector is likely to continue experiencing losses of cash unless better cash storage, cash transportation, cash insurance and cash reconciliation are adopted. The general objective of this study was to establish the effect of cash handling practices on the financial performance of commercial banks in Kenya. Specifically, the study sought to establish the effect of cash reconciliation, cash transport, cash storage and cash insurance practices on financial performance of commercial banks of Kenya. The research was carried out through a descriptive survey research design. Descriptive design was used because it focused on complex analysis to bring out the correlation of variables. The study population was all the 43 commercial banks registered and licensed to operate in Kenya. These commercial banks formed the unit of analysis. A census was conducted on all the banks. The sampling frame of the survey of the banks was one head of operations and head of finance from each of the 43 commercial banks located in Nairobi County. The target respondents was hence 86. The study used both primary and secondary data for analysis. Inferential analysis techniques including correlation, regression and t-tests were used to achieve the study objectives. SPSS version 21 was used for analysis. The study findings indicated that the correlation between cash reconciliation, cash transport, cash storage as well as cash insurance and financial performance is positive. Further results indicated that cash reconciliation had a positive significant effect on return on equity (ROE) and return on asset (ROA), cash transport had a positive significant effect on ROA, cash storage had a positive significant effect on ROA but positive insignificant effect on ROE, cash insurance had a positive significant effect on ROA but positive insignificant effect on ROE. Organization size does not moderate the relationship between cash handling practices and financial performance of commercial banks in Kenya. The study concluded that cash reconciliation is positively and significantly related to financial performance of commercial banks in Kenya, cash transport is positively and significantly related to financial performance of commercial banks, the relationship between cash storage and ROA is positive and significant and the relationship between cash insurance and ROA is positive and significant. The study also concluded that organization size does not moderate the relationship between cash handling practices and financial performance of commercial banks in Kenya. The study recommends that commercial banks and other financial institutions involved in handling of cash should put in place proper reconciliation practices for instance increasing the frequency of reconciling books. The study also recommends that commercial banks and other financial institutions involved in handling of cash should put in place proper and advanced practices when dealing with cash in transit for instance having a cash transport policy which clearly stipulates how cash in transit should be handled and regularly reviewing the contracts of companies which transport cash for them. Furthermore, the study also recommends that commercial banks and other financial institutions involved in handling of cash should put in place proper and advanced practices of cash storage for instance investing in fire proof safes for storing cash and also in closed circuit television security cameras for surveillance of cash storage areas and also invest in alarm system in cash viii storage areas and also restricted access to cash storage areas by lock, key, passwords and other security measures so as to reduce fraud arising as a result of poor cash storage practices. Another recommendation made by the study is that, commercial banks and other financial institutions involved in handling of cash should put in place proper strategies and policies which favor cash insurance for instance establishing and implementing a clear a policy for insuring cash against uncertainties like internal theft by employee, general theft (from outsiders) and fire . The study recommends that further studies can be done to establish the effect of cash handling practices on financial performance of other financial institutions other than commercial banks.