Impact of Liquidity on Bank Profitability in Nepalese Commercial Banks

Abstract

This study examines the effect of liquidity on the performance of Nepalese Commercial banks. Investment ratio, liquidity ratio, quick ratio, capital ratio, and interest coverage ratio are the independent variables used in this study. The dependent variables are return on assets, return on equity, and earnings per share. The secondary data used for this study and taking from publish annual report of six Nepalese commercial banks from the period (2011/12 to 2016/17) leading to the total observations of 36. The data was analyzed by using mean, standard deviation, coefficient of variance and multiple correlations, multiple regression and coefficient of determination run on E- view through SPSS. 22 versions. These regression models are estimated to test the relationship and impact of bank liquidity on profitability of Nepalese commercial banks. Correlation between liquidity ratio and return on assets found to be positive indicating higher the liquidity ratio higher would be the return on assets. The correlation between quick ratio, capital ratio and return on assets found to be negative indicating higher the quick ratio and capital ratio lower would be the return on assets. And also correlation between IR, ICR found to be positive and very significant relationship between return on assets and ICR. However, correlation between liquidity ratio and return on equity is found to be negative indicating higher the liquidity in the bank lower would be the return on equity. Correlation between liquidity ratio and return on equity is found to be negative indicating higher the liquidity in the bank lower would be the return on equity. Correlation quick ratio and ROE is negative relationship. IR, CR, and ICR are positively correlated with ROE. LR, IR, CR, and ICR are positively correlated with EPS and only QR is negatively correlated with EPS. Beta coefficient for IR, LR and ICR are positively significant with bank performance in term of ROA which indicate that increased IR, LR, and ICR leads to increase the performance of the banks. CR is positively significant with ROA. However, QR is negatively insignificant with bank performance. Beta coefficient for LR, CR, ICR, and IR are positively insignificant with ROE indicating higher QR, lower the profitability. Beta coefficient for LR, IR, and ICR are positive and significant with EPS. However, CR is negative and insignificant, and QR is also negative but significant with EPS indicating increased QR and CR, decreases the EPS.