| Title : | Determinants of liquidity in Nepalese commercial Banks | | Material Type: | printed text | | Authors: | Sujan Bimali, Author | | Publication Date: | 2017 | | Pagination: | 109p. | | Size: | GRP/Thesis | | Accompanying material: | 10/B | | Languages : | English | | Descriptors: | Liquidity (Economics)
| | Class number: | 332.632 | | Abstract: | Commercial banks play an important role for economic development and foster economic growth by providing number of financial services. One of the important functions of the commercial banks is the financial intermediation functions and thus it transfers the fund from surplus units to the deficit units. It accepts deposits and provides loan and advances to the needed people, institutions and investors. It also invests in several short term and long term projects. So the liquidity of banks must be optimally maintained. Liquidity means a business ability to meet its payment obligations, in terms of possessing sufficient liquid assets. An act of exchange of a less liquid asset with a more liquid asset is called liquidation. In banking, liquidity is the ability to meet obligations when they come due without incurring unacceptable losses.Moleyneux and Thornton (1992) explained that a liquid bank is one that stores adequate liquid assets and cash together with the ability to raise funds quickly from other source in order to meet its payment obligation and financial commitment in a timely manner. In such circumstances, interest rate margin, capital adequacy ratio, non-performing loan, total assets, return on equity and other several macroeconomic variables like inflation, money supply, gross domestic product and the concept of liquidity management plays a great role for analyzing the various factors affecting liquidity scenario in the context of commercial banks of Nepal. The Basel Committee (2009) explained that the viability of commercial banks depends on the liquidity position of the bank.
Liquidity risk is said to be assassin of the banks. This risk can adversely affect both bank’s earnings and the capital. Therefore, it becomes the top priority of a bank’s management to ensure the availability of sufficient funds to meet future demands of providers and borrowers, at reasonable costs. According to (Wasiuzzaman and Tarmizi, 2010), bank liquidity refers to the ability of the bank to ensure the accessibility of funds to meet financial commitments or growing obligations at a reasonable price at all times. Bank liquidity means a bank having money to satisfy the withdraw needs of the customers. Banks are motivated to hold certain level of liquid balances due to various reasons. For any financial institution, liquidity is a key concern. Liquidity is a financial term, which can be defined as the ability if organizations to quickly convert its assets into cash. It reflects a business ability to meet its payment obligations, in terms of possessing sufficient liquid assets. Liquidity signifies the aptitude of a financial firm to keep up all the time a balance between the financial inflow and outflow over time (Vento & Ganga, 2009).
The major objective of the study is to determine the factors affecting the liquidity of Nepalese commercial banks. The study is based on secondary data of 14 commercial banks with 140 observations for the period of 2006 to 2015. The main source of data include 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. For the representation of more reliable and adequate population in the sample, random sampling technique has been used in this study. The research design adopted in this study is descriptive research design.
The result shows that NICA has highest average capital adequacy ratio of 13.03 percent and RBB has highest average total assetsof Rs.102502.04 million among the selected commercial banks throughout the study period. Similarly, NBB has highest average non-performing loansof 13.354 percent, NABIL has highest average return on equity of 30.584 percent and NBL has highest average interest rate margin of 6.141 percent.
The descriptive statistics shows that the average value of Capital adequacy is 6.17 percent, non-performing loan is 4.19 percent, total assets are 44346.97 million rupees, return on equity is 16.81 percent, gross domestic product growth rateis 3.84 percent and inflation is 8.71 percent. In same way, average value of interest rate margin is 4.48 percent, foreign direct investment is 3714.53 million rupees, broad money supply is 946280.25 million rupees. In one hand, average percentage of LQ1, which is liquid assets to total assets, is 34.25 percent and the average percentage of the LQ2, which is loan to deposits, is 70.88 percent.
Among the determinants of bank’s liquidity, the highest positive and significant correlation coefficient is recorded between liquidity (LQ1) and return on equity. The liquid assets to total assets are also positively related with CA and FDI. The correlation between NPL and liquidity is negative. Unlike others, IRM, GDP and FDI are statistically insignificant with liquidity. Similarly, among the determinants of bank’s liquidity (LQ2), the highest positive and significant correlation coefficient is recorded between liquidityand capital adequacy. Total loans to Deposits are also positively correlated with IRM, ROE, GDP, INF and FDI.Similarly, the correlation between interest rate margin and liquidity is second higher in magnitude. Similarly, foreign direct investment, Inflation and broad money supply are positively correlated with liquidity.
The regression results for liquid assets to total assets (LQ1) shows that the beta coefficients for Total assets, interest rate margin and Broad money supply are positive in all the equations. The negative coefficients have been observed for GDP, non-performing loan, return on equity, capital adequacy ratio, inflation and FDI. Similarly, higher the NPL, lower would be the liquidity in term of liquid assets to total assets as the negative coefficients have been observed for non-performing loans. Similarly, the regression results fortotal loans to total deposits (LQ2) shows the beta coefficients for capital adequacy, return on equity, inflation, non-performing loan, interest rate margin and broad money supply are positive. The results also show that larger the loan, higher would be the liquidity. The negative coefficients have been observed for FDI and total assets.
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Determinants of liquidity in Nepalese commercial Banks [printed text] / Sujan Bimali, Author . - 2017 . - 109p. ; GRP/Thesis + 10/B. Languages : English | Descriptors: | Liquidity (Economics)
| | Class number: | 332.632 | | Abstract: | Commercial banks play an important role for economic development and foster economic growth by providing number of financial services. One of the important functions of the commercial banks is the financial intermediation functions and thus it transfers the fund from surplus units to the deficit units. It accepts deposits and provides loan and advances to the needed people, institutions and investors. It also invests in several short term and long term projects. So the liquidity of banks must be optimally maintained. Liquidity means a business ability to meet its payment obligations, in terms of possessing sufficient liquid assets. An act of exchange of a less liquid asset with a more liquid asset is called liquidation. In banking, liquidity is the ability to meet obligations when they come due without incurring unacceptable losses.Moleyneux and Thornton (1992) explained that a liquid bank is one that stores adequate liquid assets and cash together with the ability to raise funds quickly from other source in order to meet its payment obligation and financial commitment in a timely manner. In such circumstances, interest rate margin, capital adequacy ratio, non-performing loan, total assets, return on equity and other several macroeconomic variables like inflation, money supply, gross domestic product and the concept of liquidity management plays a great role for analyzing the various factors affecting liquidity scenario in the context of commercial banks of Nepal. The Basel Committee (2009) explained that the viability of commercial banks depends on the liquidity position of the bank.
Liquidity risk is said to be assassin of the banks. This risk can adversely affect both bank’s earnings and the capital. Therefore, it becomes the top priority of a bank’s management to ensure the availability of sufficient funds to meet future demands of providers and borrowers, at reasonable costs. According to (Wasiuzzaman and Tarmizi, 2010), bank liquidity refers to the ability of the bank to ensure the accessibility of funds to meet financial commitments or growing obligations at a reasonable price at all times. Bank liquidity means a bank having money to satisfy the withdraw needs of the customers. Banks are motivated to hold certain level of liquid balances due to various reasons. For any financial institution, liquidity is a key concern. Liquidity is a financial term, which can be defined as the ability if organizations to quickly convert its assets into cash. It reflects a business ability to meet its payment obligations, in terms of possessing sufficient liquid assets. Liquidity signifies the aptitude of a financial firm to keep up all the time a balance between the financial inflow and outflow over time (Vento & Ganga, 2009).
The major objective of the study is to determine the factors affecting the liquidity of Nepalese commercial banks. The study is based on secondary data of 14 commercial banks with 140 observations for the period of 2006 to 2015. The main source of data include 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. For the representation of more reliable and adequate population in the sample, random sampling technique has been used in this study. The research design adopted in this study is descriptive research design.
The result shows that NICA has highest average capital adequacy ratio of 13.03 percent and RBB has highest average total assetsof Rs.102502.04 million among the selected commercial banks throughout the study period. Similarly, NBB has highest average non-performing loansof 13.354 percent, NABIL has highest average return on equity of 30.584 percent and NBL has highest average interest rate margin of 6.141 percent.
The descriptive statistics shows that the average value of Capital adequacy is 6.17 percent, non-performing loan is 4.19 percent, total assets are 44346.97 million rupees, return on equity is 16.81 percent, gross domestic product growth rateis 3.84 percent and inflation is 8.71 percent. In same way, average value of interest rate margin is 4.48 percent, foreign direct investment is 3714.53 million rupees, broad money supply is 946280.25 million rupees. In one hand, average percentage of LQ1, which is liquid assets to total assets, is 34.25 percent and the average percentage of the LQ2, which is loan to deposits, is 70.88 percent.
Among the determinants of bank’s liquidity, the highest positive and significant correlation coefficient is recorded between liquidity (LQ1) and return on equity. The liquid assets to total assets are also positively related with CA and FDI. The correlation between NPL and liquidity is negative. Unlike others, IRM, GDP and FDI are statistically insignificant with liquidity. Similarly, among the determinants of bank’s liquidity (LQ2), the highest positive and significant correlation coefficient is recorded between liquidityand capital adequacy. Total loans to Deposits are also positively correlated with IRM, ROE, GDP, INF and FDI.Similarly, the correlation between interest rate margin and liquidity is second higher in magnitude. Similarly, foreign direct investment, Inflation and broad money supply are positively correlated with liquidity.
The regression results for liquid assets to total assets (LQ1) shows that the beta coefficients for Total assets, interest rate margin and Broad money supply are positive in all the equations. The negative coefficients have been observed for GDP, non-performing loan, return on equity, capital adequacy ratio, inflation and FDI. Similarly, higher the NPL, lower would be the liquidity in term of liquid assets to total assets as the negative coefficients have been observed for non-performing loans. Similarly, the regression results fortotal loans to total deposits (LQ2) shows the beta coefficients for capital adequacy, return on equity, inflation, non-performing loan, interest rate margin and broad money supply are positive. The results also show that larger the loan, higher would be the liquidity. The negative coefficients have been observed for FDI and total assets.
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