| Title : | Determinants of commercial banks’ liquidity in Nepal | | Material Type: | printed text | | Authors: | Pratima Sharma, Author | | Publication Date: | 2016 | | Pagination: | 90p. | | Size: | GRP/Thesis | | Accompanying material: | 6/B | | Languages : | English | | Descriptors: | Liquidity (Economics)
| | Class number: | 338.43 | | Abstract: | Liquidity is the ability of the bank to fund asset growth and meet its obligations as they fall due without incurring acceptable losses. The fundamental role of banks in the maturity transformation of short-term deposits into long-term loans makes banks inherently vulnerable to liquidity risk, both of an institution-specific nature and that which affects markets as a whole. Virtually every financial transaction or commitment has implications for a bank’s liquidity. Effective liquidity risk management helps ensure a bank's ability to meet cash flow obligations, which are uncertain as they are affected by external events and other agents' behavior. Liquid assets are those that can be converted to cash quickly if needed to meet financial obligations; examples of liquid assets generally include cash, central bank reserves, and government debt.
The liquidity problem of banks is primarily and basically the problem of assuring that there will be an adequate amount of cash on hand, when needed, to meet all demands for cash. The task of providing sufficient cash presents itself in two ways: the individual bank, if it is to stay in business, must be able to meet all demands for cash including those resulting from the transfer of money to other banks in the system; and banks as a whole must be able to supply whatever demands are made upon them for the purpose of drawing money out of the system, whether abroad or for use in domestic circulation. A bank should acquire proper liquidities when needed immediately at a sensible cost. Though sustaining the optimal level of liquidity is a real art of bank’s management.
In context of Nepal, there are very few or almost no studies related to determinants of commercial banks’ liquidity. It is very essential to study in the context of Nepal whether various independent variables like capital adequacy ratio, return on assets, return on equity, non-performing loan ratio, credit to deposit ratio, bank size, net interest margin and total deposits to total assets ratio affects bank’s liquidity or not. Nepal’s banking sector has been passing through ups and downs in the last few years. For instance, Nepal faced the liquidity crunch a few years ago and now the banking sector has problems of excessive liquidity. There are various research conducted on determinants of liquidity in different countries such as Malaysia, Pakistan, Tunisia, etc. but almost no single research has been conducted on determinants of liquidity in Nepal. Though, a number of studies in various developing and developed countries have been conducted, findings of these studies may not be applied in Nepalese context. The study attempts to explore the various factors affecting determinants of liquidity of Nepalese commercial bank.
For this study, the sample includes all the commercial banks whose data is available for the study period 2007/08 -2013/14. After analyzing the total population (i.e. 30 commercial banks from financial statement analysis of Nepal Rastra Bank) the sample of 18 banks is selected. This study used seven years secondary data from different sources. The data regarding different variables are collected from the NRB supervision report and statistical report issued by NRB. Descriptive statistics, correlation analysis and regressions have been carried out to examine the secondary data. To achieve the objectives of this study, a model was developed using liquidity as the dependent variable and capital adequacy ratio, return on assets, return on equity, non-performing loan ratio, credit to deposit ratio, bank size, net interest margin and total deposit to total assets ratio as independent variables.
Based on the results, capital adequacy ratio, non-performing loan ratio, credit to deposits ratio, bank size and total deposits to total assets ratio are among the most dominant variables that affect the banks liquidity in the context of Nepalese commercial banks. Capital adequacy ratio, return on equity, bank size, net interest margin and total deposit to total assets ratio are negatively correlated with liquid assets to total assets ratio. Return on assets, non-performing loan ratio and credit to deposit ratio are positively related with liquid assets to total assets ratio. Likewise, return on assets, non-performing loan ratio and bank size total loans to total assets ratio are negatively correlated with total loans to total assets ratio. Capital adequacy ratio, return on equity, credit to deposit ratio, net interest margin and total deposit to total assets ratio are positively correlated with total loans to total assets ratio.
The recommendation put forward by this study is that capital adequacy ratio, non-performing loan ratio, credit to deposits ratio, bank size and total deposits to total assets ratio are most determining variables of banks’ liquidity so banks must consider these as important variables to make the decision related to liquidity of bank. Hence, it is recommended for all the banks to take preventive measures before the banks face illiquidity problems.
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Determinants of commercial banks’ liquidity in Nepal [printed text] / Pratima Sharma, Author . - 2016 . - 90p. ; GRP/Thesis + 6/B. Languages : English | Descriptors: | Liquidity (Economics)
| | Class number: | 338.43 | | Abstract: | Liquidity is the ability of the bank to fund asset growth and meet its obligations as they fall due without incurring acceptable losses. The fundamental role of banks in the maturity transformation of short-term deposits into long-term loans makes banks inherently vulnerable to liquidity risk, both of an institution-specific nature and that which affects markets as a whole. Virtually every financial transaction or commitment has implications for a bank’s liquidity. Effective liquidity risk management helps ensure a bank's ability to meet cash flow obligations, which are uncertain as they are affected by external events and other agents' behavior. Liquid assets are those that can be converted to cash quickly if needed to meet financial obligations; examples of liquid assets generally include cash, central bank reserves, and government debt.
The liquidity problem of banks is primarily and basically the problem of assuring that there will be an adequate amount of cash on hand, when needed, to meet all demands for cash. The task of providing sufficient cash presents itself in two ways: the individual bank, if it is to stay in business, must be able to meet all demands for cash including those resulting from the transfer of money to other banks in the system; and banks as a whole must be able to supply whatever demands are made upon them for the purpose of drawing money out of the system, whether abroad or for use in domestic circulation. A bank should acquire proper liquidities when needed immediately at a sensible cost. Though sustaining the optimal level of liquidity is a real art of bank’s management.
In context of Nepal, there are very few or almost no studies related to determinants of commercial banks’ liquidity. It is very essential to study in the context of Nepal whether various independent variables like capital adequacy ratio, return on assets, return on equity, non-performing loan ratio, credit to deposit ratio, bank size, net interest margin and total deposits to total assets ratio affects bank’s liquidity or not. Nepal’s banking sector has been passing through ups and downs in the last few years. For instance, Nepal faced the liquidity crunch a few years ago and now the banking sector has problems of excessive liquidity. There are various research conducted on determinants of liquidity in different countries such as Malaysia, Pakistan, Tunisia, etc. but almost no single research has been conducted on determinants of liquidity in Nepal. Though, a number of studies in various developing and developed countries have been conducted, findings of these studies may not be applied in Nepalese context. The study attempts to explore the various factors affecting determinants of liquidity of Nepalese commercial bank.
For this study, the sample includes all the commercial banks whose data is available for the study period 2007/08 -2013/14. After analyzing the total population (i.e. 30 commercial banks from financial statement analysis of Nepal Rastra Bank) the sample of 18 banks is selected. This study used seven years secondary data from different sources. The data regarding different variables are collected from the NRB supervision report and statistical report issued by NRB. Descriptive statistics, correlation analysis and regressions have been carried out to examine the secondary data. To achieve the objectives of this study, a model was developed using liquidity as the dependent variable and capital adequacy ratio, return on assets, return on equity, non-performing loan ratio, credit to deposit ratio, bank size, net interest margin and total deposit to total assets ratio as independent variables.
Based on the results, capital adequacy ratio, non-performing loan ratio, credit to deposits ratio, bank size and total deposits to total assets ratio are among the most dominant variables that affect the banks liquidity in the context of Nepalese commercial banks. Capital adequacy ratio, return on equity, bank size, net interest margin and total deposit to total assets ratio are negatively correlated with liquid assets to total assets ratio. Return on assets, non-performing loan ratio and credit to deposit ratio are positively related with liquid assets to total assets ratio. Likewise, return on assets, non-performing loan ratio and bank size total loans to total assets ratio are negatively correlated with total loans to total assets ratio. Capital adequacy ratio, return on equity, credit to deposit ratio, net interest margin and total deposit to total assets ratio are positively correlated with total loans to total assets ratio.
The recommendation put forward by this study is that capital adequacy ratio, non-performing loan ratio, credit to deposits ratio, bank size and total deposits to total assets ratio are most determining variables of banks’ liquidity so banks must consider these as important variables to make the decision related to liquidity of bank. Hence, it is recommended for all the banks to take preventive measures before the banks face illiquidity problems.
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