LIQUIDITY AND PROFITABILITY OF NEPALESE MICROFINANCE COMPANIES

Abstract

The relationship between liquidity and profitability is a critical area of focus for financial institutions, including microfinance companies. This study investigates the dynamics between liquidity management and profitability within the context of microfinance companies of Nepal. Specifically, it examines the impact of liquidity and the profitability of five selected microfinance companies over a ten-year period, from 2070/71 to 2079/80. The research employs descriptive and analytical methods to analyze the financial data, utilizing various liquidity ratios such as Capital Ratio, Credit Deposit Ratio, Net Credit Facilities to Total Asset Ratio, Deposit Asset Ratio, ROA and ROE. The findings reveal a significant relationship between liquidity and profitability of Nepalese microfinance companies. It also reveals that liquidity management plays crucial role in sustaining profitability, with a delicate balance required between maintaining sufficient liquidity and optimizing returns. Excess liquidity was found to potentially limit profitability due to opportunity cost of idel funds, while insufficient liquidity could threaten operational stability. This study contributes to the existing literature by providing insights into unique challenges faced by microfinance companies in Nepal and offering strategic recommendations for enhancing financial performance through effective liquidity management.