Impact of Liquidity on Profitability of Commercial Banks in Nepal

Abstract

The study was to examine the liquidity and its impacts on profitability in the context of Nepalese commercial banks. Change in return on equity and return on assets was the dependent variable while the current ratio, cash and bank balance to total deposit ratio, current deposit to total deposit ratio and cash reserve ratio were chosen as independent variables. The research design was based on descriptive and analytical and sampled were collected by using convenience sampling method. The data were collected from the annual reports of selected commercial banks, report of Nepal Rastra Bank and other official and unofficial publications. Data were analyzed by using appropriate financial and statistical tools and the descriptive research design was used. The multiple regression models were used to test the liquidity and its impacts on profitability. The findings from this study indicate that there was positive relationship between the CDTDR with ROA & ROE .The relationship between ROA and ROE with CR, CBTDR, and CDTDR & CRR of commercial banks is positive but not significant. The study found that CR, CBTDR, CDTDR &CRR explain only 18% on determining the return on assets of banks and around 82% is unexplained. Similarly,the study found that CR, CBTDR, CDTDR &CRR explain only 37% on determining the return on equity of banks and around 63% is unexplained.The study recommends that other studies is to be done to identify other factors which may explain the remaining percent roles on determining the profitability of commercial banks. The result could not be generalized at this moment due to small sample size and there is a need for extensive research on this issue in Nepal.