| Title : | Effect of liquidity risk on performance of Nepalese commercial banks | | Material Type: | printed text | | Authors: | Prakash Poudel, Author | | Publication Date: | 2017 | | Pagination: | 102p. | | Size: | GRP/Thesis | | Accompanying material: | 9/B | | Languages : | English | | Descriptors: | Liquidity (Economics)
| | Class number: | 658.152 | | Abstract: | General banking business involves the mobilization of funds from excess or surplus units of the economy and giving out to deficit units as loans and advances. This is called financial intermediation. Liquidity is the ability of financial institutions to meet their short-term obligations (Olagunju et al., 2011). It is the ability of banks to change their assets into cash in a shortest possible time. The performance of these functions by banks opens them to several risks; prominent among these is liquidity risk. Liquidity risk is the risk of loss to a bank resulting from its inability to meet its needs for cash. The liquidity of a commercial bank is its ability to fund all contractual obligations as they fall due (Lartey et al., 2013).
Jenkinson (2008) illustrated that liquidity risk affects the performance of a bank. The bank may lose the confidence of its accountholders if funds are not provided to them in time. It is the ability of banks to change their assets into cash in a shortest possible time. Nwankwo (2004) explained that the banking liquidity management is simply to meet financial commitment whether it is withdrawing from a current account or interbank deposit or a maturing issue of commercial paper. Bank liquidity refers to the ability of a bank to raise certain amount of funds at a certain cost within a certain period of time to discharge obligations (Andabai and Bingilar, 2015). The greater the amount of funds a bank can raise in a certain time at a specified cost, the more liquid the bank is (Mehar, 2001). A firm should ensure that it does not suffer from lack-of or excess liquidity to meet its short-term compulsions. A study of liquidity is of major importance to both the internal and external analysis because of its close relationship with day-to-day operations of a business (Bhunia and Khan, 2011). Diamond and Rajan (1999) found that holding sufficient liquidity is necessary to ensure against liquidity risk.
Mathuva (2009) found that there is a positive relationship between profitability and liquidity of commercial banks in Kenya. Liquidity management determines the quantity of profits as well as the value of shareholders’ wealth. Bagchi (2013) found that there is a negative relationship between the measures of liquidity management and firms’ profitability. Liquidity of banks and profitability are highly correlated (Ayodele and Oke, 2013).
The major objective of the study is to analyse the effect of liquidity risk on performance in context to Nepalese commercial banks. The study is based on secondary data of 20 commercial banks with 140 observations for the period of 2010 to 2015. The main source of data includes various issues of Banking and Financial Statistics, Quarterly Economic Bulletin, Bank Supervision Report published by Nepal Rastra Bank and Annual Reports of selected commercial banks. The pooled cross sectional data analysis has been undertaken in the study. The research design adopted in this study is descriptive and causal comparative research design as it deals with the effect of liquidity risk on performance in context to Nepalese commercial banks.
The result shows that NBBL has highest average ROA, and ADB has the highest average NIM among the selected commercial banks throughout the study period. Similarly, the average current ratio is highest for BOK (6.66 times), average total deposit is highest for NABL (Rs. 65.73 billion), average non-performing loans is highest for ADB (6.49 percent), average capital adequacy ratio is highest for LBL (20.61 percent), average credit to deposit ratio is highest for ADB (105.45 percent), average quick ratio is highest for NCC (35.11 times) and average firm size is highest for NABL (Rs. 75 billion).
The descriptive statistics for selected Nepalese commercial banks shows that the average return on assets, total deposit, non-performing loans, capital adequacy ratio, credit to deposit ratio, quick ratio and firm size is 1.73 percent, 3.44 percent, 3.98 times, Rs. 34.39 billion, 2.06 percent, 12.8 percent, 78.10 percent, 15.13 times and Rs. 40.30 billion respectively.
The correlation matrix shows that total deposit, capital adequacy ratio, credit to deposit ratio and firm size are positively related to return on assets and net interest margin whereas current ratio and quick ratio are negatively related to return on assets and net interest margin.
The regression results show that current ratio and quick ratio have significant negative impact on the banks performance (ROA and NIM) indicating higher the current ratio and quick ratio, lower would be the return on assets and net interest margin. Similarly, capital adequacy ratio has significant positive impact on the return on assets and net interest margin. This indicates increase in capital adequacy ratio leads to increase in return on assets and net interest margin. The study also reveals that non-performing loans and credit to deposit ratio have significant positive impact with net interest margin indicating higher the non-performing loans and credit to deposit ratio, higher will be the net interest margin of Nepalese commercial banks.
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Effect of liquidity risk on performance of Nepalese commercial banks [printed text] / Prakash Poudel, Author . - 2017 . - 102p. ; GRP/Thesis + 9/B. Languages : English | Descriptors: | Liquidity (Economics)
| | Class number: | 658.152 | | Abstract: | General banking business involves the mobilization of funds from excess or surplus units of the economy and giving out to deficit units as loans and advances. This is called financial intermediation. Liquidity is the ability of financial institutions to meet their short-term obligations (Olagunju et al., 2011). It is the ability of banks to change their assets into cash in a shortest possible time. The performance of these functions by banks opens them to several risks; prominent among these is liquidity risk. Liquidity risk is the risk of loss to a bank resulting from its inability to meet its needs for cash. The liquidity of a commercial bank is its ability to fund all contractual obligations as they fall due (Lartey et al., 2013).
Jenkinson (2008) illustrated that liquidity risk affects the performance of a bank. The bank may lose the confidence of its accountholders if funds are not provided to them in time. It is the ability of banks to change their assets into cash in a shortest possible time. Nwankwo (2004) explained that the banking liquidity management is simply to meet financial commitment whether it is withdrawing from a current account or interbank deposit or a maturing issue of commercial paper. Bank liquidity refers to the ability of a bank to raise certain amount of funds at a certain cost within a certain period of time to discharge obligations (Andabai and Bingilar, 2015). The greater the amount of funds a bank can raise in a certain time at a specified cost, the more liquid the bank is (Mehar, 2001). A firm should ensure that it does not suffer from lack-of or excess liquidity to meet its short-term compulsions. A study of liquidity is of major importance to both the internal and external analysis because of its close relationship with day-to-day operations of a business (Bhunia and Khan, 2011). Diamond and Rajan (1999) found that holding sufficient liquidity is necessary to ensure against liquidity risk.
Mathuva (2009) found that there is a positive relationship between profitability and liquidity of commercial banks in Kenya. Liquidity management determines the quantity of profits as well as the value of shareholders’ wealth. Bagchi (2013) found that there is a negative relationship between the measures of liquidity management and firms’ profitability. Liquidity of banks and profitability are highly correlated (Ayodele and Oke, 2013).
The major objective of the study is to analyse the effect of liquidity risk on performance in context to Nepalese commercial banks. The study is based on secondary data of 20 commercial banks with 140 observations for the period of 2010 to 2015. The main source of data includes various issues of Banking and Financial Statistics, Quarterly Economic Bulletin, Bank Supervision Report published by Nepal Rastra Bank and Annual Reports of selected commercial banks. The pooled cross sectional data analysis has been undertaken in the study. The research design adopted in this study is descriptive and causal comparative research design as it deals with the effect of liquidity risk on performance in context to Nepalese commercial banks.
The result shows that NBBL has highest average ROA, and ADB has the highest average NIM among the selected commercial banks throughout the study period. Similarly, the average current ratio is highest for BOK (6.66 times), average total deposit is highest for NABL (Rs. 65.73 billion), average non-performing loans is highest for ADB (6.49 percent), average capital adequacy ratio is highest for LBL (20.61 percent), average credit to deposit ratio is highest for ADB (105.45 percent), average quick ratio is highest for NCC (35.11 times) and average firm size is highest for NABL (Rs. 75 billion).
The descriptive statistics for selected Nepalese commercial banks shows that the average return on assets, total deposit, non-performing loans, capital adequacy ratio, credit to deposit ratio, quick ratio and firm size is 1.73 percent, 3.44 percent, 3.98 times, Rs. 34.39 billion, 2.06 percent, 12.8 percent, 78.10 percent, 15.13 times and Rs. 40.30 billion respectively.
The correlation matrix shows that total deposit, capital adequacy ratio, credit to deposit ratio and firm size are positively related to return on assets and net interest margin whereas current ratio and quick ratio are negatively related to return on assets and net interest margin.
The regression results show that current ratio and quick ratio have significant negative impact on the banks performance (ROA and NIM) indicating higher the current ratio and quick ratio, lower would be the return on assets and net interest margin. Similarly, capital adequacy ratio has significant positive impact on the return on assets and net interest margin. This indicates increase in capital adequacy ratio leads to increase in return on assets and net interest margin. The study also reveals that non-performing loans and credit to deposit ratio have significant positive impact with net interest margin indicating higher the non-performing loans and credit to deposit ratio, higher will be the net interest margin of Nepalese commercial banks.
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