Impact of Liquidity on Profitability-Free-Samples for Students

Quetion: Discuss about the Impact of liquidity on profitability of commercial banks in Nepal. Answer: Introduction In the modern world there has been a development various organizations and along with that there has been rise in transactions among the banks, individuals and companies. There has been a rise in the operational activities of the commercial banks with the rise in the transactional activities among the organizations and even among the individuals. Pradhan, Shrestha (2016) has cited that managers of the commercial banks takes the responsibility of managing the management of the liquidity in order to compute the loan and the deposit which acts as a correlation among the profitability of the banks while on the other hand, Pradhan, Khadka (2017) recognises that liquidity assesses the capability of the business in order to satisfy the payment of the present accountabilities which is inclusive of the financial and operating costs during the short term and even during the maturity of the long term debts. The extent of liquidity indirectly transforms the segment of the profitability and Gizaw et al., (2015) has explained that liquidity is a fundamental factor to evaluate the profitability as well as bigger financial crisis and stability. The risk can be compared and assessed with the liquidity ratio while the bank has an increased level of liquidity ratio which explains the low returns and decreased level of risk (Pradhan, Manandhar 2017). This paper therefore looks to assess the impact of liquidity on the profitability of the commercial banks in Nepal. Problem Statement The statement of the problem explains the factor and the reason why this kind of researches have been undertaken in accordance to this topic. The commercial banks that are functioning in Nepal have their own individual goals and policies and therefore they operate in the economy in order to attain the same. Profitability is one of the key concerns of the bank and a bank without profit would be unable to function in the economy of Nepal (Alshatti, 2015). The extent of profitability has a key impact and therefore it becomes essential to determine the impact of liquidity on the profitability of the commercial banks in Nepal. The assessments of the various ratios that are associated to the profitability of the banks in Nepal are assessed and thereby an idea has been attained in accordance to which the answer to this research can be obtained. Research Aims and Objectives The research has the key aim and objective of evaluating the extent of profitability of the commercial banks by relying on the total assets. The distinct objectives of the paper have been to attain the key objectives. The main objectives are as follows: To assess the position of profitability of the commercial banks in Nepal To evaluate the liquidity scenario of the commercial banks in Nepal To assess the effect of liquidity on the profitability of the commercial banks in Nepal Research Questions The research questions are as follows: Q1. What is the extent of profitability of the commercial banks in Nepal? Q2. What is the liquidity scenario of the commercial banks in Nepal? Q3. Does liquidity have an impact on the profitability of the commercial banks in Nepal? Literature Review Concept of liquidity According to Abdullah, Naser (2015), liquidity is a measure to the level to which an individual or a company has their level of cash in order to satisfy the immediate and the short term assets and obligations that can be converted in order to do this. Liquidity can even be understood as a measure of the ease and the capability with the help of which the asset can be converted quickly into cash. The liquid assets are those assets that can be quickly converted into cash in order to satisfy the financial accountabilities for instances the liquid assets are inclusive of the reserves of the central bank, cash and government debts. In order to remain viable the banks and the financial organizations needs to have sufficient liquid assets in order to satisfy their short term liabilities like the withdrawals undertaken by the depositor. According to Marahatta et al., (2016), liquidity can even be termed as the capacity of the banks to increase their funding in the assets and satisfy the unexpected and expected cash and the warranty obligations at economical costs and by not incurring the losses that are unacceptable. Liquidity is even known as a financial term that refers to the amount of capital that is available for the purpose of investment. In the current economy, most of the capital is known as credit and not cash. The liquidity of the banks generally means the capability of the banks to preserve adequate funds in order to pay out for their obligations of maturity (Mekonnen, 2015). It is the ability of the banks to meet the cash immediately and even the other obligations of withdrawal and legitimate the demand for new loans while staying in line with the current requirements of the reserve. Liquidity Relevance in Deposit Money Banks According to Claessens, Horen (2014), banking liquidity computes the cash availability and the rate at which the current assets are altered into cash in order to satisfy the extra and the ordinary requests. There have been numerous scholars who have observed liquidity as a measure for the bargaining power of the banks and their strengths as well. Mendoza, Rivera (2017) has viewed that more efficient a deposit money bank is during the management of their liquidity, the stronger is the capability to give out loanable funds. Sufficient amount of liquidity aids a bank to meet their three risks which are known as the funding risk, time risk the lending risk. The supervision and management of the deposit money of the liquidity of the banks decreases the probability of increasing the loans under undesirable contracts, limitations and at an increased interest bearing expenses (Sharma, 2016). The process of liquidity management in the deposit money banks even decreases the level of bankrupt cy and liquidation which are actually an outcome of liquidity and thereby aids in safeguarding the deposits of the consumers. In order to conclude in a simple manner, the liquidity aids to maintain and develop public confidence of the depositors and the financial markets. In case the financial market notices to have the banks face liquidity issues, the banks may not be allowed to bring in additional funds and of permitted, it would be at a higher premium (Ghimire et al., 2016). Furthermore, monitoring of the liquidity also acts as a measure with the help of which the over liquidity and under-liquidity which can have a negative effect on the extent of profitability can be restricted. Expected Income Theory This theory tries to explain that the liquidity of the banks can be controlled with the assistance of effective management and modelling the commitments of the loan that has been made by the banks to their customers. In this scenario, liquidity can be planned if the redemption of the loan that is scheduled in undertaken by a bank to the customers. by looking into the future of the borrower (Opoku, 2016). In accordance to Shah, Pradhan (2017), the theory stresses on the income potential and the credit worthiness of an individual borrower as the most extensive guarantee for ensuring sufficient amount of liquidity. This theory has therefore unfenced many deposit money banks to incorporate a developed investment collection. Demand and supply of liquidity The commercial banks require sufficient amount of liquid assets in order to satisfy the immediate financial requirements of the customers and the banks to gather the funds in order to satisfy the customer demands (Aspal, Nazneen 2014). There are two sorts of sources in order to understand the demand for the expense funds of the banks and the resources have been the withdrawal deposited money from the accounts and the requests for credit from the consumers that may in the form of a new request for loan, renewal of the loans that are existent or drawing on the current facilities of credit. The other liquidity demand sources are paying off the past borrowings like the loans received by the banks from the central or the other commercial banks (Shrestha, 2016). In the same manner the income tax payment or the cash dividend to the shareholders increases to the demand for the distinct fund. The most key sources for a bank is the receipt from the deposits of a new customer. The banks can cr eate funds from the selling of the marketable securities like the treasury bonds and bills from the portfolio of the investments (Pandey, 2018). The banks can raise the liquidity flow from the profit that is established by selling off the non-deposit services and from borrowing from the money market with the help of the division of the treasury. Liquidity Risk The risk related to liquidity takes place in the banks when the financial obligations of the customers are not accomplished within the desired time frame or the inability to satisfy their obligations when they become due without having any unexpected losses (Boadi et al., 2016). Liquidity risks even takes place from the failure to recognise the transformations of the market scenarios that have an impact on the capability to liquidate the assets faster and with the least amount of loss in the value (Olawumi et al., 2017). There are numerous sources that leads to liquidity risks if the banks are recognised with unanticipated transformations in the capital cost, abnormal financial market behaviour and the risks that generates from the macroeconomic imbalances and secondary sources. Research Methodology The research methodology of the paper looks to examine the data that would be obtained an the process of data collection with the help of which effective and precise data can be gathered from the purpose of undertaking the analysis of the research paper and thereby discovering the answers that are effective for the research. Data Collection Procedures The objective of data collection of the research is to determine the impact of liquidity on the profitability of the commercial banks in Nepal. This research is in nature descriptive and is reliant on the secondary data sources in order to undertake an extensive research. In this research paper, the researcher has exploited the general secondary data sources as the secondary data have been obtained from several journals, books, internet websites and the annual reports of the banks that are operating in Nepal (Aftab et al., 2015). Secondary data has been even obtained from the past researches and these has been an cost efficient and cost reducing strategy. The secondary data can even be useful for highlighting the present problems and it is reasonable as it reduces the cost for the collection of the primary data. The data that are garnered are quantitative in nature and the gathering of the methodology for the research paper explains the empirical methodology and the estimation of the future process that would be exploited (Islam, Nishiyama 2016). The research has even collected information from the IPFS, from where the data related to the banks operating in Nepal has been collected and thereby the paper can move forward. The premium data in accordance to the banks in Nepal was not gathered as these data were inaccessible to the researcher. Data Analysis This research has focused on collecting quantitative data and this data would be evaluated by taking help of the quantitative data assessment method. Rani, Zergaw (2017) have cited that quantitative data analysis process is a systematic method to undertaken examinations within which the numerical data is gathered and the research changes the data that is gathered into numerical data. It generally explains the events and the situations and thereby assisting in explaining the issues related to the research. This process aids in computing the attributes related to the topic. The researcher would look to examine the dependent variable with the independent variable in order to have certain idea about how liquidity has an impact on the profitability of the commercial banks (Abdellahi et al., 2017. The data has undergone various mechanisms with the help of which the results that are desired can be attained. Data Analysis This section of the paper would look to discover and analyse the data that has been attained in order to have an idea about the research issues and the questions that have been constructed earlier in this paper. The paper has selected 8 banks that are operational in Nepal and has undertaken an in-depth analysis of their Return on Asset along with the Liquid and Ratio of their each for the year 2008/09 and a comparison with the year 2016/17. Descriptive Statistics Descriptive Statistics for ROA, Liquid Ratio and Quick Ratio for the year 2008/09 2008/09 NABIL NIB SCBN HB NSBI NBB EB BOK Mean 4.46333 7.52333 4.2 5.30333 3.41667 16.1233 7.64333 5.78667 Standard Error 2.2933 4.76283 2.30435 3.66665 1.75294 6.17453 5.37273 3.11182 Median 2.55 3.93 2.56 1.91 2.36 18.04 2.83 3.12 Standard Deviation 3.97212 8.24946 3.99125 6.35082 3.03619 10.6946 9.30583 5.38983 Sample Variance 15.7777 68.0536 15.9301 40.3329 9.21843 114.374 86.5985 29.0502 Skewness 1.66467 1.58823 1.53686 1.71797 1.37642 -0.7806 1.70486 1.68142 Range 7.22 15.28 7.46 11.26 5.79 21.13 16.64 9.74 Minimum 1.81 1.68 1.29 1.37 1.05 4.6 1.73 2.25 Maximum 9.03 16.96 8.75 12.63 6.84 25.73 18.37 11.99 Sum 13.39 22.57 12.6 15.91 10.25 48.37 22.93 17.36 Count 3 3 3 3 3 3 3 3 Confidence Level(95.0%) 9.86729 20.4928 9.91482 15.7763 7.54231 26.5669 23.117 13.3891 The comparison of the three variables out of which ROA is the dependent variable and the other two are independent variables explains that they have median that ranges from 1.91 to 18.04 and the mean value ranges from 3.41 to 16.12. There exists a standard deviation of 3.03 to 10.69. Descriptive Statistics for ROA, Liquid Ratio and Quick Ratio for the year 2016/17 2016/17 NABIL NIB SCBN HB NSBI NBB EB BOK Mean 4.47667 7.38667 4.25333 5.3 3.64667 15.7233 7.58667 5.61667 Standard Error 2.52703 4.73785 2.39906 3.61533 2.00817 6.02925 5.19822 3.06502 Median 2.24 3.62 2.42 2.03 2.1 17.94 3 3.06 Standard Deviation 4.37694 8.2062 4.15529 6.26194 3.47825 10.443 9.00358 5.30877 Sample Variance 19.1576 67.3417 17.2664 39.2119 12.0982 109.055 81.0645 28.183 Skewness 1.69906 1.63034 1.59894 1.7091 1.60535 -0.9122 1.6975 1.66453 Range 7.85 15.06 7.68 11.17 6.42 20.53 16.16 9.65 Minimum 1.67 1.74 1.33 1.35 1.21 4.35 1.8 2.07 Maximum 9.52 16.8 9.01 12.52 7.63 24.88 17.96 11.72 Sum 13.43 22.16 12.76 15.9 10.94 47.17 22.76 16.85 Confidence Level(95.0%) 10.8729 20.3853 10.3223 15.5555 8.64046 25.9418 22.3661 13.1877 The analysis of the data for the year 2016/17 explains that the mean value has a range of 4.25 to 15.72 and the median has a value ranging from 2.1 to 3.62. The standard deviation of the dependent and the independent variables ranges from 3.47 to 10.44. Correlation Correlation for ROA, Liquid Ratio and Quick Ratio for the year 2008/09 Correlation 0.62691 0.7599849 MSE 1.00988 1.9234633 The tables indicate that all the variables that have been taken into consideration are closely related to each other and thereby indicating that liquidity does have an impact on the profitability of the commercial banks in Nepal in the year 2008-09. Correlation for ROA, Liquid Ratio and Quick Ratio for the year 2016/17 Correlation 0.62619 0.771961 MSE 1.0031 1.8770473 The values that have been gathered in accordance to the banks and their liquidity and profitability, it is seen that similar to the year 2008-09 the values are closely related as the figures are very close to 1 indicating that the variables are connected to each other indicating that similar to the year 2008-09 liquidity has an impact on the profitability. Discussion Descriptive Statistics The comparison of the mean, median and standard deviation values for the banks in the 2008/09 and 2016/17 has explained that there has been a rise in the profitability and has liquidity has significant amount of impact on the profitability of the banks that are functional in Nepal. The figures have even explained that with the advent of time there has been a rise in the level of profit and the liquid assets in the banks have increased as well (Kadioglu et al., 2017). This indicates that there has been a rise in the level of deposits and accordingly the level of giving out loans by the banks has increased as well. Hence, the level of liquidity in the banks is a key factor as well as this is indicative in ascertaining the level of profit for the company as well. Correlation The correlation that has been attained in the year 2008/09 explains that all return on Assets, Liquid Ratio and Current Ratio are all closely related to each other as the values are close to one. The values even indicate that all the banks are closely related to each other as well. It is even seen that in the year 2016/17 the correlation among the independent and dependent variables are similar to each other as even in this case the values are close to 1. This indicates that independent and the dependent variables that have been selected for this paper are interrelated to each other (Waleed et al., 2015). It can therefore be said that liquidity has direct impact on the profitability of the commercial banks in Nepal. The discussion is therefore similar to the assessments that have been made in the literature review. Conclusion The key aim of the research has been to discover the impact of liquidity on the profitability of the commercial banks in Nepal. The research questions that have been constructed even try to answer the same. The first question tries to address the extent of profitability in the commercial banks in Nepal and the results indicate that there has been a rise in the level of profit from the year 2008/09 to the year 2016/17. The second question has looked to answer the liquidity scenario of the banks and the figures have been able to signify that liquidity has increased in the banks with the advent of time. The last question has tried to discover the impact of liquidity on the level of profitability and the results indicate that liquidity is correlated to the profitability of the company and profitability of the banks changes in accordance to the changes in the level of profitability. Therefore it is essential for the banks to construct plans and policies with the help of which such issues can be mitigated and profitability in maintained in the commercial banks in Nepal. Limitations The limitation associated with the research has been the time shortage which has restricted the researcher to collect data from the other banks as well. A longer time would have encouraged the researcher to collect more data and thereby attain better results. The other limitation for the research has been that this research is reliable on the secondary sources and the websites may provide data in accordance to their perspectives. The results may lack the biasness and preciseness that needs to be existent in the paper. Recommendation The recommendation that can be given in accordance to this paper has been that the banks should construct effective strategies and policies with the help of which they would be able to regulate their liquidity and profitability from time to time. 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