IMPACT OF LIQUIDITY ON PROFITABILITY IN NEPALESE COMMERCIAL BANKS

Abstract

This study investigates the impact of liquidity on profitability in Nepalese commercial banks. Descriptive and causal research design has been employed in this study. This study used descriptive analysis, correlation analysis and multiple regression analysis to analyze the data. This study shows that there is strong liquidity position in terms of liquid assets to total assets ratio and also strong profitability position of sample banks in term of ROA and ROE means sample banks have efficiently utilized its assets through mobilizing its deposit because they have high ratios. The correlation analysis shows that cash to deposit ratio and liquid assets ratio have insignificant positive correlation with ROA and significant positive relationship with ROE. However, loan to deposit ratio has significant positive association with profitability (ROA and ROE) of the banks. The correlation analysis also shows that capital adequacy has insignificant positive relationship with ROA but significant negative relationship with ROE. Further, deposit ratio has significant positive relationship with ROA and ROE of the banks. The study also reveals that cash to deposit ratio has insignificant positive impact on ROA and ROE of the banks. Similarly, liquid assets to total assets ratio has no significant impact on profitability (ROA and ROE) of commercial banks in Nepal. However, loan to deposit ratio has significant negative impact on profitability (ROA and ROE). At the meantime, capital adequacy ratio has significant positive impact on ROA and significant negative impact on ROE of the banks. Moreover, deposit ratio has insignificant positive impact on profitability of commercial banks in Nepal. Therefore, this study concluded that there is insignificant effect of liquidity on profitability of commercial banks in Nepal. Keywords: Return assets, return on equity, cash to deposit ratio, liquid assets to total assets ratio and loan to deposit ratio.