THE EFFECT OF LIQUIDITY ON PROFITABILITY OF MICROFINANCE COMPANIES IN NEPAL
Date
2024
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Shanker Dev Campus
Abstract
Many institutions worldwide lack a formal and suitable financial policy on the
administration and management of liquidity. For financial institutions experiencing fastpaced growth like microfinance banks, the establishment of norms and policies to
administer cash and liquidity is nonetheless crucial for the institutional viability as much
in the short term as in the long term. This study sought to establish the effect of liquidity
on profitability of microfinance companies in Nepal. The population of the study was
comprised of all 65 microfinance companies in Nepal operating in the years 2015 to
2022. Fora microfinance bank to qualify it needed to have been in operation during the
whole period of the study and therefore institutions that were not in operation in the
wholeperiod of study were eliminated Secondary data was used in conducting the study.
The study involved secondary data collection of the return on assets, to measure
profitability and the ratio of loans to deposits to measure liquidity during a specific year.
The study used secondary data obtained from Central Bank of Nepal, annual supervision
reports and Association of Microfinance institutions annual publications. The study used
descriptive statistics and regression analysis to establish the relationship between the
study variables. The response rate was 67% that is a total 3 out of 65 licensed
microfinance banks in Nepal that satisfied the data collection criteria. The study found out
that there is a weak negative relationship between liquidity and profitability of
microfinance banks in Nepal. Liquidity was found to be one of the determinants of
profitability of Microfinance Banks in Nepal. The study recommends that the finance
managers of microfinance banks maintain optimal levels of liquidity in order to remain
profitable.
Key Words: Capital Adequacy Ratio, Operation Efficiency, Liquidity Ration, Asset
Quality, Return on Asset