International Journal of Economics, Commerce and Management United Kingdom Vol. V, Issue 10, October 2017 Licensed under Creative Common Page 681 http://ijecm.co.uk/ ISSN 2348 0386 EFFECT OF ASSET LIABILITY MANAGEMENT ON LIQUIDITY RISK OF MICRO-FINANCE BANKS IN KENYA A SURVEY OF BANKS IN NAIROBI COUNTY Moses Wapangana Mamati Accountant, Kisii University, Kenya mosesmamati@gmail.com Caroline Ayuma Lecture, Kisii University, Kenya ayumapsbe@gmail.com Phares Kenneth Mwirigi Accountant, Kisii University, Kenya mwirigiphares@gmail.com Abstract Asset Liability Management is an important determinant of financial distress. The main objective of the study was to investigate the course of asset liability management on the liquidity risk of micro-finance banks in Kenya. The specific objectives of the study was to; examine the effect of liquidity stress testing on liquidity risk of Micro-finance banks in Kenya; To determine the effect of loan to deposit ratio on liquidity risk of Micro-finance banks in Kenya; To determine the effect of return on assets on liquidity risk of Microfinance banks in Kenya; and to determine the effect of return on equity on liquidity risk of Microfinance banks in Kenya. The study was grounded on Redington's Theory of Immunization, Liquidity Preference theory, The Commercial Loan Theory, and The Liability Management Theory. The study adopted a descriptive research survey. The study was carried out in Micro finance banks headquarters in Nairobi County. The research adopted census; therefore all the twelve registered Micro-finance banks by Central Bank of Kenya were included in the study. Primary data was collected using questionnaire. The validity of the research instrument was determined through a pilot study while the reliability was determined through Cronbach alpha. The secondary data were obtained from annual Central