Impact of Liquidity Management on Bank Profitability in Nepalese Commercial Banks

Abstract

This study examines the impact of liquidity management on the profitability of Nepalese commercial banks. The return on assets and return on equity are the dependent variables. The independent variables are the capital ratio, total deposits, current ratio, liquid asset ratio, quick ratio and investment ratio. This study is based on secondary sources of data that are collected for18 commercial banks through 2009/10 to 2014/15, leading to a total of 120 observations. The data were collected from Quarterly Economic Bulletin and Bank Supervision Reports published by Nepal Rastra Bank and annual reports of the selected commercial banks. The regression models are estimated to test the significance of liquidity management on the profitability of Nepalese commercial banks. The result shows that capital ratio is positively related to return on assets. This indicates that higher the capital ratio, higher would be the return on assets. Likewise, the study reveals that investment ratio and current assets ratio are positively related to return on assets and return on equity. This indicates that increase in investment ratio and current assets ratio leads to increase in return on assets and return on equity. However, the study reveals that liquid asset ratio is negatively related to return on assets and return on equity. This indicates that higher the liquid asset ratio, lower would be the return on assets and return on equity. The regression result shows that beta coefficients are positive for current assets ratio and liquid asset ratio with return on equity. However, the study reveals that beta coefficients are negative for quick ratio with return on assets.

Keywords

• current ratio
• quick ratio
• return on assets
• return on equity
• liquid asset ratio
• capital ratio