| Title : | Liquidity management and banks profitability: a case of Nepalese commercial banks | | Material Type: | printed text | | Authors: | Geeta Thapa Magar, Author | | Publication Date: | 2016 | | Pagination: | 88p. | | Size: | GRP/Thesis | | Accompanying material: | 7/B | | Languages : | English | | Descriptors: | Bank liquidity
| | Class number: | 658.155 | | Abstract: | Liquidity management is important in the current financial situations and the state of the world economy. The importance of liquidity management as it affects corporate profitability in today’s business cannot be over emphasized. Liquidity plays a significant role in the successful functioning of banks (Eljelly, 2004). A major adequate financial intermediation requires the purposeful attention of the bank management to profitability and liquidity, which are two conflicting goals of the commercial banks. These goals are parallel in the sense that an attempt for a bank to achieve higher profitability will certainly erode its liquidity and solvency positions and vice versa (Olagunju et al., 2011). While the immediate survival of banks anchors on its liquidity, its long term survival and growth depends on profitability. Thus, banks should ensure that it does not suffer from lack of or excess liquidity to cover up its short-term obligations (Kurawa & Abubakar, 2014). Baral (2005) suggested that maintaining the high liquidity position to minimize liquidity risks adversely affects the profitability of financial institutions.
This study investigates the impact of liquidity management on profitability of commercial banks of Nepal. The specific objectives of this study are: a) to identify the most important indicators of the liquidity management, b) to access the effect of each indicator on the banks' profitability, c) to determine the liquidity management efficiency of commercial banks of Nepal, d) to analyze the liquidity position on the basis of financial ratios of the selected Nepalese commercial banks in Nepal, e) to examine the relationship of firm size and financial leverage with the Nepalese commercial banks profitability.
The study has employed descriptive and causal comparative research designs to deal with the fundamental issues associated with the relationship between the liquidity management and banks profitability and liquidity factors influencing the profitability in the context of Nepal. The study is based on secondary data. The variables used in the study are categorized into liquidity management indicators as current ratio, liquid ratio, capital adequacy ratio, cash to deposit ratio, loan and advance to deposit ratio and control variables as firm size and financial leverage. Secondary data were collected from supervision reports of NRB and various annual reports of different commercial banks. This study covers data for 7 years ranging for year 2007/08 to 2013/14. Regression models were estimated to test the significance of the liquidity management variables on banks profitability.
The study reveals that there is positive relationship of return on assets with liquid ratio, capital adequacy ratio, loan and advance to deposit ratio and firm size. Current ratio, cash to deposit ratio and financial leverage is negatively related with return on assets. Similarly, there is positive relationship of return on equity with the liquid ratio, firm size and financial leverage. However current ratio, capital adequacy ratio, cash to deposit ratio and loan and advance to deposit ratio are negatively related with the return on equity. The result also shows that there is positive relationship of net interest margin with capital adequacy ratio, cash to deposit ratio, loan and advance to deposit ratio and firm size whereas, current ratio, liquid ratio and financial leverage are negatively related with the net interest margin. The study revealed that current ratio has negatively and highly significant impact on profitability of banks. Hence, the banks willing to increase the performance need to reduce current ratio. Banks are recommended to decrease liquid assets in comparison to total assets to have higher net interest as the study shows negative relationship between liquid assets and net interest margin. Banks should focus on to decrease the cash to deposit ratio to increase the return on equity as result indicates the negative and significant relationship between cash to deposit ratio and return on equity.
The major conclusion of this study is that the profitability of Nepalese commercial banks is highly influenced by the current ratio. Commercial banks having high current assets in comparison to current liabilities become less profitable. There is negative and highly significant relationship between the current ratio and that the relationship is more evident in firms with high current ratio. Therefore, more than enough current assets cause decrease in bank’s profitability. The study also concludes that the liquid ratio, capital adequacy ratio, cash to deposit ratio, loan and advance to deposit ratio, firm size and financial leverage are statically significant factors that determines the profitability of commercial banks in Nepal.
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Liquidity management and banks profitability: a case of Nepalese commercial banks [printed text] / Geeta Thapa Magar, Author . - 2016 . - 88p. ; GRP/Thesis + 7/B. Languages : English | Descriptors: | Bank liquidity
| | Class number: | 658.155 | | Abstract: | Liquidity management is important in the current financial situations and the state of the world economy. The importance of liquidity management as it affects corporate profitability in today’s business cannot be over emphasized. Liquidity plays a significant role in the successful functioning of banks (Eljelly, 2004). A major adequate financial intermediation requires the purposeful attention of the bank management to profitability and liquidity, which are two conflicting goals of the commercial banks. These goals are parallel in the sense that an attempt for a bank to achieve higher profitability will certainly erode its liquidity and solvency positions and vice versa (Olagunju et al., 2011). While the immediate survival of banks anchors on its liquidity, its long term survival and growth depends on profitability. Thus, banks should ensure that it does not suffer from lack of or excess liquidity to cover up its short-term obligations (Kurawa & Abubakar, 2014). Baral (2005) suggested that maintaining the high liquidity position to minimize liquidity risks adversely affects the profitability of financial institutions.
This study investigates the impact of liquidity management on profitability of commercial banks of Nepal. The specific objectives of this study are: a) to identify the most important indicators of the liquidity management, b) to access the effect of each indicator on the banks' profitability, c) to determine the liquidity management efficiency of commercial banks of Nepal, d) to analyze the liquidity position on the basis of financial ratios of the selected Nepalese commercial banks in Nepal, e) to examine the relationship of firm size and financial leverage with the Nepalese commercial banks profitability.
The study has employed descriptive and causal comparative research designs to deal with the fundamental issues associated with the relationship between the liquidity management and banks profitability and liquidity factors influencing the profitability in the context of Nepal. The study is based on secondary data. The variables used in the study are categorized into liquidity management indicators as current ratio, liquid ratio, capital adequacy ratio, cash to deposit ratio, loan and advance to deposit ratio and control variables as firm size and financial leverage. Secondary data were collected from supervision reports of NRB and various annual reports of different commercial banks. This study covers data for 7 years ranging for year 2007/08 to 2013/14. Regression models were estimated to test the significance of the liquidity management variables on banks profitability.
The study reveals that there is positive relationship of return on assets with liquid ratio, capital adequacy ratio, loan and advance to deposit ratio and firm size. Current ratio, cash to deposit ratio and financial leverage is negatively related with return on assets. Similarly, there is positive relationship of return on equity with the liquid ratio, firm size and financial leverage. However current ratio, capital adequacy ratio, cash to deposit ratio and loan and advance to deposit ratio are negatively related with the return on equity. The result also shows that there is positive relationship of net interest margin with capital adequacy ratio, cash to deposit ratio, loan and advance to deposit ratio and firm size whereas, current ratio, liquid ratio and financial leverage are negatively related with the net interest margin. The study revealed that current ratio has negatively and highly significant impact on profitability of banks. Hence, the banks willing to increase the performance need to reduce current ratio. Banks are recommended to decrease liquid assets in comparison to total assets to have higher net interest as the study shows negative relationship between liquid assets and net interest margin. Banks should focus on to decrease the cash to deposit ratio to increase the return on equity as result indicates the negative and significant relationship between cash to deposit ratio and return on equity.
The major conclusion of this study is that the profitability of Nepalese commercial banks is highly influenced by the current ratio. Commercial banks having high current assets in comparison to current liabilities become less profitable. There is negative and highly significant relationship between the current ratio and that the relationship is more evident in firms with high current ratio. Therefore, more than enough current assets cause decrease in bank’s profitability. The study also concludes that the liquid ratio, capital adequacy ratio, cash to deposit ratio, loan and advance to deposit ratio, firm size and financial leverage are statically significant factors that determines the profitability of commercial banks in Nepal.
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