| Title : | Impact of liquidity on profitability in Nepalese commercial banks | | Material Type: | printed text | | Authors: | Deepa Shrestha, Author | | Publication Date: | 2016 | | Pagination: | 67p. | | Size: | GRP/Thesis | | Accompanying material: | 4/B | | General note: | Including bibilography | | Languages : | English | | Descriptors: | Banks
Banks and banking
Commercial banks
liquidity on profitability
| | Keywords: | 'liquidity economics nepal commercial banks banks' | | Class number: | 332.632 | | Abstract: | Liquidity is a financial term that means the amount of capital that is available for investment. Today, most of this capital is credit fund. That is because the large financial institutions that do most investments prefer using borrowed money (Felix and Claudine, 2008). Low interest rates mean credit is cheaper, thus, businesses and investors are more likely to borrow. The return on investment has to be higher than the interest rate, to make investments attractive. In this way, high liquidity spurs economic growth (Heffernan, 1996). The banking institution had contributed significantly to the effectiveness of the entire financial system as they offer an efficient institutional mechanism through which resources can be mobilized and directed from less essential uses to more productive investments (Wilner, 2000).
Liquidity creation itself is seen as the primary source of economic welfare contribution by banks and also as their primary source of risk (Bryant 1980; Diamond and Dybvig 1983; Calomiris and Kahn 1991). Therefore, virtually every financial transaction or commitment has implications for bank’s liquidity. In Nepalese context, Karki (2004) found that liquidity ratio was relatively fluctuating over the period, return on the equity is found satisfactory and there is positive relationship between deposits and loan advances. Joshi (2004) found that the liquidity and banks loan are positively related to banks profitability and Maharjan (2007) revealed that the capital adequacy and liquidity is positively associated with banks profitability.
This study has aimed to determine the impact of bank liquidity on financial performance through analyzing statistically significant factors affecting banks liquidity on financial performance. The other objectives are: to investigate the impact of liquidity risk on performance of Nepalese commercial banks, to analyze the effect of capital ratio to the return on equity and return on assets as financial performance measure of the Nepalese commercial banks, to analyze the effect of changes in investment ratio of the banks to the financial performance, to investigate the relationship of the liquidity ratio with financial performance measured by return on equity (ROE) and return on assets (ROA), and to examine the effect of quick ratio/acid-test ratio to the financial performance of the commercial banks.
The research design adopted in this study consists of descriptive and causal comparative research designs to deal with the various issues raised in this study. The descriptive research design has been adopted to undertake fact- finding operation searching for adequate information in Nepalese context. The study is based on pooled cross-sectional analysis of secondary data of 16 commercial banks for the period 2005/06 to 2013/14.
Results revealed that return on equity is positively related to investment ratio which is similar to result with return on assets. This indicates that higher the investment ration higher would be the return on assets and return on equity. Similarly, correlation between capital ratio and return on equity found to be positive indicating higher the capital ratio higher would be the return on equity. However, the correlation between return on equity and liquidity ratio is found to be negative indicating higher the liquidity in the bank lower would be the return on equity. Further, the correlation is found to be negative for quick ratio with return on equity, this result is contradictory to result with return on assets. Beta coefficient is positive for investment ratio and capital adequacy with bank performance and it is significant at one percent level, which indicates that increased investment ratio and capital ratio increases the bank performance of the banks. However, beta coefficient for liquidity ratio and quick is negative with return on assets and return on equity indicating increased liquidity ratio and quick ratio decreases the return on assets and return on equity of the bank, but this relation is not significant at five percent level.
This study concludes that liquidity status of the bank plays important role in banking performance in case of Nepalese commercial banks. This study revealed that investment ratio, liquidity ratio and capital ratio has positive impact on bank performance, while quick ratio has positive impact on the same. The result with one year lagged variables also showed similar result that higher liquidity ratio, investment ratio and increased capital ration result in increase in the bank performance measured by return on assets and return on equity. However, the negative relation with quick ratio showed that increased quick ratio may leads to decrease in bank performance. The study suggests that banks willing to increase bank performance should increase capital ratio and investment ratio while should control liquidity ratio and quick ratio.
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Impact of liquidity on profitability in Nepalese commercial banks [printed text] / Deepa Shrestha, Author . - 2016 . - 67p. ; GRP/Thesis + 4/B. Including bibilography Languages : English | Descriptors: | Banks
Banks and banking
Commercial banks
liquidity on profitability
| | Keywords: | 'liquidity economics nepal commercial banks banks' | | Class number: | 332.632 | | Abstract: | Liquidity is a financial term that means the amount of capital that is available for investment. Today, most of this capital is credit fund. That is because the large financial institutions that do most investments prefer using borrowed money (Felix and Claudine, 2008). Low interest rates mean credit is cheaper, thus, businesses and investors are more likely to borrow. The return on investment has to be higher than the interest rate, to make investments attractive. In this way, high liquidity spurs economic growth (Heffernan, 1996). The banking institution had contributed significantly to the effectiveness of the entire financial system as they offer an efficient institutional mechanism through which resources can be mobilized and directed from less essential uses to more productive investments (Wilner, 2000).
Liquidity creation itself is seen as the primary source of economic welfare contribution by banks and also as their primary source of risk (Bryant 1980; Diamond and Dybvig 1983; Calomiris and Kahn 1991). Therefore, virtually every financial transaction or commitment has implications for bank’s liquidity. In Nepalese context, Karki (2004) found that liquidity ratio was relatively fluctuating over the period, return on the equity is found satisfactory and there is positive relationship between deposits and loan advances. Joshi (2004) found that the liquidity and banks loan are positively related to banks profitability and Maharjan (2007) revealed that the capital adequacy and liquidity is positively associated with banks profitability.
This study has aimed to determine the impact of bank liquidity on financial performance through analyzing statistically significant factors affecting banks liquidity on financial performance. The other objectives are: to investigate the impact of liquidity risk on performance of Nepalese commercial banks, to analyze the effect of capital ratio to the return on equity and return on assets as financial performance measure of the Nepalese commercial banks, to analyze the effect of changes in investment ratio of the banks to the financial performance, to investigate the relationship of the liquidity ratio with financial performance measured by return on equity (ROE) and return on assets (ROA), and to examine the effect of quick ratio/acid-test ratio to the financial performance of the commercial banks.
The research design adopted in this study consists of descriptive and causal comparative research designs to deal with the various issues raised in this study. The descriptive research design has been adopted to undertake fact- finding operation searching for adequate information in Nepalese context. The study is based on pooled cross-sectional analysis of secondary data of 16 commercial banks for the period 2005/06 to 2013/14.
Results revealed that return on equity is positively related to investment ratio which is similar to result with return on assets. This indicates that higher the investment ration higher would be the return on assets and return on equity. Similarly, correlation between capital ratio and return on equity found to be positive indicating higher the capital ratio higher would be the return on equity. However, the correlation between return on equity and liquidity ratio is found to be negative indicating higher the liquidity in the bank lower would be the return on equity. Further, the correlation is found to be negative for quick ratio with return on equity, this result is contradictory to result with return on assets. Beta coefficient is positive for investment ratio and capital adequacy with bank performance and it is significant at one percent level, which indicates that increased investment ratio and capital ratio increases the bank performance of the banks. However, beta coefficient for liquidity ratio and quick is negative with return on assets and return on equity indicating increased liquidity ratio and quick ratio decreases the return on assets and return on equity of the bank, but this relation is not significant at five percent level.
This study concludes that liquidity status of the bank plays important role in banking performance in case of Nepalese commercial banks. This study revealed that investment ratio, liquidity ratio and capital ratio has positive impact on bank performance, while quick ratio has positive impact on the same. The result with one year lagged variables also showed similar result that higher liquidity ratio, investment ratio and increased capital ration result in increase in the bank performance measured by return on assets and return on equity. However, the negative relation with quick ratio showed that increased quick ratio may leads to decrease in bank performance. The study suggests that banks willing to increase bank performance should increase capital ratio and investment ratio while should control liquidity ratio and quick ratio.
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