IMPACT OF LIQUIDITY ON THE

PROFITABILITY OF COMMERCIAL BANKS

IN NEPAL

PRESENTED BY: SUJATA CHAULAGAI

EXAM ROLL-NO: 20030216
 BACKGROUND OF THE STUDY

• A day-to-day management of a firm’s short-term assets and liabilities plays an important

role in the success of the firm. Firms with glowing long-term prospects and healthy bottom
lines do not remain solvent without good liquidity management. Hence, despite the
maximization of shareholder wealth still remaining the ultimate objective of any firm,
preserving a firm’s liquidity is equally an important objective.
• Profitability refers to a situation where output exceeds input that is the value created by the
use of resources. Profit could be taken as a yardstick to measure the success of any
business enterprise
• As such, a firm should balance the different interest objectives. Increasing profits at the
cost of liquidity can bring serious problems to the firm and a tradeoff between these two
objectives of the firms needs to be struck. If a firm does not care about profit, it will not
survive for a longer period while on the other hand, if it does not care about liquidity, it
may face the problem of insolvency or bankruptcy.
 OBJECTIVE OF STUDY

The main objectives of the study is to examine the “impact of liquidity on the profitability of
commercial banks of Nepal”. The specific objectives are as follows:

 To assess the structures and trend of independent variables Net Interest Margin, Capital
Adequacy Ratio, Credit-Deposit-Ratio and dependent variables Return on Assets, Return
on Equity.

 To evaluate the association among independent variables Net Interest Margin, Capital
Adequacy Ratio, Credit-Deposit-Ratio and dependent variables Return on Assets, Return
on Equity.

 To examine the impact of independent variables Net Interest Margin, Capital Adequacy
Ratio, Credit-Deposit-Ratio and dependent variables Return on Assets, Return on Equity.
 CONCEPTUAL FRAMEWORK

DEPENDENT VARIABLES INDEPENDENT VARIABLES

NET INTEREST MARGIN

RETURN ON ASSETS
RETURN ON EQUIY

CAPITAL ADEQUACY RATIO

CREDIT TO DEPOSIT RATIO

 RESEARCH METHOD

Selecting an appropriate research method or technique to investigate the impact of liquidity on

profitability requires careful consideration and a well-structured approach. Below are some research
methods and tools commonly used in financial research, particularly when studying the impact of
liquidity on profitability:
• Nature of Data: Pooled Data
• Source of Data: Secondary Data
• Research Design: Quantitative Analysis
• No. of Sample: ‘A’ class 5 commercial banks are used for the research method listed in the NEPSE
constitute study.
• Statistical Tools: Descriptive tools i.e. ( Arithmetic Mean, Standard Deviation, Median, Coefficient
variables, skewness, kurtosis, Correlation, and Regression) are used for research method.
 REGRESSION MODEL
Coefficients Standard Error t Stat P-value

Intercept -26.1427488 15.10521229 -1.730710453 0.098172713

NIM 1.712906143 0.641520329 2.670073053 0.014328164
CAR 0.482380228 0.279563924 1.725473806 0.099129118
CDR 0.289230378 0.131800217 2.194460564 0.039588504

Regression Statistics
Multiple R 0.599944668
R Square 0.359933605
Adjusted R Square 0.268495548
Standard Error 3.029783839
Observations 25
 DATA PRESENTATION

• The value of the coefficient of multiple determinations R Square is 0.359933605. It implies that
the independent variables (i.e., NIM, CAR, CDR) contributed 35.99% in the variation of ROA
and ROE at a 95% confidence interval. The chance of error in the estimate is 3.029783839. The
finding of the coefficient of multiple determinations R Square shows that 35.99% of changes in
ROA and ROE of Nepalese commercial banks by NIM, CAR & and CDR and the remaining
64.01% contribute by other quantitative and qualitative factors. R is the correlation coefficient
which shows the relationship between the dependent and independent variables. In finding, the
above table shows that there is a high degree of significantly positive relationship between the
dependent and independent variables as shown by 0.599944668.
•Predictors: (Constant), NIM, CAR, CDR

•Dependent Variables: ROA, ROE

 MAJOR FINDINGS AND DISCUSSION
•Some of the major findings of the research are pointed out below:
1. NABIL and SCB have maintained the highest profitability and cash-to-deposit ratio
among the entire sampled bank under study.
2. All sampled banks have maintained a moderate level of Capital adequacy ratio.
3. Siddhartha Bank and NMB bank average performance.
4. SCB has the highest return on assets whereas NABIL has the poorest.
• With the analysis and evaluation of various financial and statistical tools, all sampled
banks under study should collect more amounts of deposits through a variety of deposit
schemes and facilities. Moreover, SCB and NABIL must keep a wide vision of
investment.
 SUMMARY

• This study has been prepared to know about the relationship between liquidity and profitability and the position
of liquidity and profitability in NABIL, PRABHU, SIDDHARTHA, NMB, and SCB from commercial banks
and impact of liquidity on profitability based on multiple regression analysis tools with help of SPSS version.
Five sample banks were selected to analyze the data. The results reveal that liquidity factors or variables affect
profitability positively and negatively. Independent variables are CAR, CDR, and NIM and dependent variables
are ROA and ROE.
• In the first chapter, the background Information, Introduction banks, objectives of the study, Literature review
of the study as a conceptual review, and research methods are included. Then, the second chapter includes data
presentation and analysis of major findings and a discussion of liquidity and profitability. The third chapter
includes the research summary and conclusions to conclude the impact of the liquidity on profitability of
Nepalese commercial banks regarding the entire study and research.
• For the analysis and interpretation of the data of the study, different financial and statistical tools are used. The
data are obtained from the annual report of 5 commercial banks with the financial statement of 5 years i.e.
2016/17 to 2021/22 selected for the purpose of evaluation
 CONCLUSION

• In conclusion, this study highlights the significance of liquidity in influencing the profitability of
commercial banks in Nepal. By managing liquidity effectively, banks can achieve financial stability
and enhance their overall performance in a competitive banking landscape. Policymakers,
regulators, and bank management can use these findings to make informed decisions and develop
strategies that foster the growth and sustainability of the Nepalese banking sector.
Through the analysis and findings liquidity of Nabil Bank and SCB Bank is comparatively lower
than the other three banks i.e. Prabhu, Siddharth, and NMB Bank.
Nabil Bank and SCB Bank has the highest investment to total deposit and they both have good
liquidity position and risk ratio
Analyzing the profitability we can observe that Nabil, SCB bank has higher return on loan, ROA
and ROE .
THANK YOU FOR YOUR COORDINATION AND
PATIENCE.