The Impact of Liquidity on Jordanian Banks Profitability through Return on Assets

Abstract

Every stakeholder has interest in the liquidity situation of a company. Suppliers of goods will review the liquidity of the company before selling goods on credit. Employees should also be worried about the company’s liquidity to know whether the company can cover its employee related obligations–salary, pension, etc. So, a company needs to keep sufficient liquidity so that liquidity extremely affects profits of which some part that will be divided to shareholders. Liquidity and profitability are closely related because one increases the other decreases.  Bank profitability is the ability of a bank to generate revenue in excess of cost, in relation to the bank’s capital base. A profitable banking sector is better able to resist negative impact and share in to the stability of the financial system. This study sought to find out whether liquidity through quick ratio has significant impact on Jordanian banks profitability through return on asset (ROA). The study used the 2005-2011 financial reports of 15 Jordanian banks listed at Amman Stock Exchange (ASE). The study revealed that there is significant impact of independent variable quick ratio on dependent variable return on asset (ROA). That means profitability through return on assets (ROA) in Jordanian banks is significantly influenced by liquidity through quick ratio.

Keywords: Return on Asset (ROA), Quick ratio, Amman Stock Exchange (ASE).