The Determinants of Liquidity of Commercial Banks in Bangladesh: An Exploratory Study

Abstract

The main aim of the paper is to investigate the liquidity determinants of commercial banks of Bangladesh. The study has applied Pooled OLS Regression analysis to a panel data of 20 scheduled commercial banks for the period 2008 to 2019. Both asset-based indicator of liquidity (LQ₁) (Liquid assets to total assets) and liability-based indicator of liquidity of banks (LQ₂) (total loans to total deposit ratio) have been undertaken as dependent variable. The results indicate that among the bank–specific factors, capital adequacy ratio, deposits ratio, and return on assets are found to have positive impact on bath LQ₁ and LQ₂.While bank size, asset quality and profitability have negative impact on both LQ₁ and LQ₂. With respect to macro-economic variables, the results indicate that GDP has positive and significant effect on both LQ₁ and LQ₂ and Inflation has negative and insignificant impact on both LQ₁ and LQ₂. The commercial banks and Bangladesh bank should give emphasis for the above-mentioned ratios to achieve smooth liquidity management and to reduce liquidity risk. The study recommended that bankers should reduce the nonperforming loans for smooth functioning of operation.

Keywords: Bank liquidity, asset quality, capital adequacy ratio, profitability, economic growth, and inflation.

DOI: 10.7176/RJFA/12-19-02

Publication date:October 31^st 2021