IMPACT OF LIQUIDITY MANAGEMENT ON FIRM’S PROFITABILITY: THE CASE OF PRIVATE BANKING SECTOR OF PAKISTAN

Abstract

Purpose- This research study is aim to demonstrate the impact of liquidity management on profitability on the private commercial banks of Pakistan. As the banking sector is the backbone of any economy it is important to determine various impact of factors on its profitability therefore for this particular research, banking sector is chosen. The main purpose if the study is to determine the significance level of the relation between the independent and dependent variables representing both liquidity and profitability of the chosen banks. Methodology- The population selected for this research was the 21 private banks of Pakistan of which sample size of ten banks were taken. Secondary data was used in the research for the period of 2006 to 2016 that is of eleven years to get enough data to support the analysis. The data is extracted from the annual reports of Habib bank limited, United bank limited, Muslim commercial bank limited and Allied bank limited, Bank A1 Habib Limited, Habib Metro, Bank Alfalah, Faysal Bank, Meezan Bank, Askari Bank and also from the financial sector analysis report published by State Bank of Pakistan each year. To analyze the data, multiple linear regression tests was applied. Finding- It was found that there is there is a positive significant relation between cash ratio with ROA, ROE and EPS. Current ratio has an inverse significant relation with ROA and ROE. Whereas, net advances to total liabilities only has an inverse significant relation with EPS. Thus, the empirical result reveals significant relation between bank’s liquidity with that of its profitability. Practical Implications- The research outcomes might help bank’s policy makers to understand the impact of liquidity management on profitability. Banks need to reassess the structuring of their liquidity management in order to create higher yield for its shareholders, better utilization of its asset and to get higher earning per outstanding shares. The outcome of this research cannot be generalized to other sectors of the economy as only banking sector data was used.