Trade-off between liquidity and profitability of commercial banks in Nepal

Abstract

This study examines the relationship between liquidity and profitability of Nepalese commercial banks, addressing the critical balance between these two factors crucial for bank growth and sustainability. Using a descriptive research approach, secondary data from annual reports of ten prominent commercial banks in Nepal over a decade (2016/17-2022/23) was analyzed. Liquidity was measured by current ratio, Quick Ratio Credit to Deposit Ratio, Cash Reserve Ratio, Interest Rate Spread and Capital Adequacy Ratio while profitability was assessed using indicators such as Return on Assets (ROA) and Return on Equity (ROE). Correlation and regression analyses were employed to explore the relationship between liquidity and profitability. The findings reveal a positive and statistically significant association between liquidity and profitability among Nepalese commercial banks during the study period. Specifically, banks like ADBL and NABIL demonstrated strong positions in both liquidity and profitability. These results underscore the importance of effectively managing liquidity to enhance profitability in the banking sector, offering insights relevant for strategic decision-making and policy formulation within Nepalese financial institutions.