Trade-Off between Liquidity and Profitability: A Comparative Study between State Banks and Private Banks in Sri Lanka

Abstract

Banks are the one of the most popular financial institution and those banks contribute the economic development and growth of economic. The banks play a crucial role in the competitive environment. Nowadays various types of human society wants to invest in banks and to earn more interest and obtain the other additional facilities such as leasing, loan, pawing and mortgage. An efficient and effective liquidity management provides an enjoyable profitability and leads to survival. There the purpose arises on the study is to find out the effect of liquidity on banks and also compare the banking organization that which bank play a better role, and also give suggestion based on the findings. The present study is initiated on liquidity and profitability trade –off with the samples of State Banks and private Banks in Sri Lanka over period of 2008-2012. All samples are licensed commercial banks. Current ratio (CR) and Quick ratio (QR) were used to measure liquidity as well as Net Profit margin (NP), Return on Assets (ROA) and Return on Equity (ROE) were used to measure the dependent variable as Profitability. The Statistical tests were used to find out the effects of liquidity and Profitability these are: descriptive statistics, correlation and regression analysis. The study found that insignificant correlation between liquidity and profitability both State Banks and Private Banks. And regression shows the negative impact of liquidity on profitability in selected Banks in Sri Lanka.

Keywords: Liquidity, Profitability, Trade-off, Banks in Sri Lanka.