Liquidity Management and Profitability of Nepalese Commercial Banks

Abstract

ABSTRACT This study delves into understanding the intricate dynamics of liquidity and profitability within the context of Nepalese commercial banks. With a focused objective, it aims to analyze the liquidity and profitability positions, examining the correlation between liquidity ratios and profitability metrics, and assessing the impact of liquidity on profitability. Six commercial banks were selected using a stratified random sampling method to represent a subset of the sector. Data primarily sourced from financial statements, annual reports, and secondary sources like the Nepal Rastra Bank and Nepal Stock Exchange. These selected banks exhibit a consistent pattern of maintaining adequate liquidity levels to meet short-term obligations, with a notable inclination towards holding significant cash reserves relative to immediate liabilities. Moreover, extending credit to customers is a prevalent practice, indicating a reliance on credit for financing activities. Despite some fluctuations, these banks generally uphold satisfactory capital buffers and display healthy financial metrics such as return on equity (ROE), net profit margin (NPM), and return on assets (ROA). The research adopts both descriptive and causal research designs, employing comparative, analytical, and descriptive methodologies. Correlation analysis underscores the delicate balance required between liquidity, credit exposure, and capital adequacy to achieve favorable ROE, illustrating the complexity of financial decision-making within these institutions. Regression analysis further elucidates the importance of factors such as the credit deposit ratio and cash ratio in influencing key financial performance metrics. In conclusion, while acknowledging limitations like the focused sample and reliance on secondary data, this study provides valuable insights into the nuanced relationship between liquidity management and profitability in Nepalese commercial banks. It contributes significantly to understanding financial dynamics and offers practical and theoretical implications for both industry practitioners and academic scholars alike. Keywords: Liquidity, Profitability, Cash Deposit Ratio, Capital Adequacy Ratio, Cash Reserve Ratio, Return on Equity, Net Profit Margin and Return on Assets