Liquidity and Profitability of Development Banks in Nepal

Abstract

The primary objective of this study was to assess the liquidity and profitability of Nepali commercial banks. Through comparative descriptive and causal research methodologies, the study aimed to achieve specific research goals. Panel data spanning from 2013/14 to 2022/23 from ten Nepalese development banks were utilized for comprehensive analysis. The study employed several independent variables such as the cash reserve ratio, CD ratio, capital adequacy ratio, and company size, while profitability indicators (ROA and ROE) served as dependent variables. Secondary data sources were crucial for this study, enabling a rigorous examination through panel data analysis using ordinary least squares (OLS) regression. Key findings indicate a significant positive correlation between the current to deposits ratio and ROE, highlighting the impact of liquidity on profitability. Moreover, the regression analysis underscored the statistically significant relationships between ROE and the independent variables. Regarding ROA, the study revealed that it is notably influenced by the cash reserve ratio, company size, and capital adequacy ratio. Notably, while the cash reserve ratio and capital adequacy ratio showed marginal effects on ROA, liquidity emerged as a critical determinant of development bank profitability. The implications of these findings are substantial, potentially guiding policymakers and bankers in making informed decisions to enhance the profitability of financial institutions. By understanding the nuanced relationships between liquidity, capital structure, and profitability metrics, stakeholders can adopt targeted strategies to optimize financial performance amidst dynamic economic landscapes. Thus, this study contributes valuable insights that could inform strategic initiatives aimed at bolstering the financial health and sustainability of Nepali development banks.