Determinants of of liquidity in commercial banks in Nepal

Abstract

The objective of study is to analyze trend of bank liquidity, to examine the relationship and effects of bank specific variables and macro-economic variables on liquidity and to examine the determinants of liquidity. The auto regressive distributed lag model has been employed including unit root, bound test for cointegration and error correction model using all commercial banks quarterly data covering the period from Oct 2006 to July 2021. The bank’s liquidity was taken as a dependent variable which functioned against both bank specific and macroeconomic determinants. The study shows that growth in liquidity was observed to be relatively slow in compared to other independent variables such as deposit, loan, capital, assets, money supply, government expenditure, remittance and public debt. the trend line of bank liquidity in the commercial banks is instable, fluctuating and declining. The results revealed that banks assets and remittances are the statistically significant determinant of commercial bank’s liquidity in Nepal. It was also found that the remittance, bank’s assets, banks deposit and remittance is positively related to bank’s liquidity. On the contrary, the results revealed a negative relationship of commercial bank’s liquidity with banks credit, banks capital, money supply, government expenditure and public debt. Remittances (macro-economic variables (counter variables)) was observed to have more significant impact on commercial banks liquidity in Nepal in comparison to banks assets (micro-economic variables (core variables) of banks liquidity. This study has significant implication for bankers, consumers and policymakers. The banking sector of Nepalese will highly be benefited from this research as this paper critically analyses the determinants of commercial bank’s liquidity. This study infers that the central bank of Nepal needs to implement a tight monetary policy and other necessary laws to bring the unwelcome effects of inflation on Nepalese banks liquidity and to route all of the remittance in the national economy through banking channels and banks also needs to monitor the factors cautiously in order to maintain acceptable levels of liquidity and to avoid the liquidity crisis in the future. Regulatory authority must consider the bank specific factors for liquidity management and also needs to implement tight monetary policy as per the market situation in order to reduce money supply.