THE IMPACT OF CAPITAL ADEQUACY RATIO, DEPOSITS, PROFITABILITY AND BANK SIZE ON COMMERCIAL BANK'S LIQUIDITY RISK IN PAKISTAN.

Abstract

Purpose The research purpose is to examine the impact of commercial bank-specific indicators (Deposits, Profitability, Bank Size and Capital Adequacy Ratio) upon Liquidity Risk in Pakistan. Methodology & Design The research Design is based on quantitative and longitudinal research in which Secondary data is used to determine the cause and effect of the Capital Adequacy Ratio, Profitability, Deposits and Bank Size upon the Liquidity and considered panel least square methodology to examine top 5 banks (MCB, HBL, UBL, ABL and Bank Alfalah) data ranging from 2006- 2016 in which only privately owned commercial banks were taken which had the bank size of same in nature with respect to the category of the privately owned scheduled commercial banks operating in Pakistan. Findings The findings explained that deposits do not have any significant impact upon Bank Liquidity whereas rest of variables Capital Adequacy, Profitability and Bank Size were found significant. Furthermore negative correlation was found between profitability and bank liquidity however, positive correlation was found between Capital Adequacy (Tierl ratio), Size of the bank with the liquidity of the bank. Limitations Top five systematical private commercial Pakistani banks (MCB, HBL, UBL, ABL and ALFALAH) are considered in this study, future research can be carried out on large sample size. The data taken for the study is for only 11 years i.e. 2006-2016 due to unavailability of the data on the banks official website database. Comparative study among different types of banks is completely skipped off fiiture studies can fill that gap by doing comparative study of nature. This study does not include any external macro-economic indicators only top five private sector commercial banks were included in the study. Recommendations Deposits are insignificant with relation to liquidity in this study because concerned parties do not have much problems in maintaining SBP prescribed Liquidity reserves. But to avoid uncertainty SBP needs to provide deposit insurance to the customers of the private commercial banks. Profitability is significant to liquidity in this study, so policy makers and bank managers need to have stringent risk management strategies in the operations of the private banks. Capital Adequacy is significant to liquidity in this study, so banks need to comply the required recommendations of Basel III to have higher capital adequacy ratio to maintain more liquidity. Bank Size has been found significant to liquidity in this study, so policy makers and bank managers need to maintain higher liquid assets by ensuring and creating customer relationships with depositors and investors to attract more liquidity.