Liquidity Management and Profitability: A Perspective of Sri Lankan Licenced Commercial Banks

Abstract

The present study examines the effect of liquidity management on banks profitability in Sri Lanka. Long term assets are more profitable than liquid assets. It is a mandatory function to invest in assets which generate high profit. 26 Sri Lankan banks are taken for the study and 20 years’ annual data of licensed Sri Lankan commercial banks from 1998 to 2017 have been used. Liquidity management is the independent variable and profitability is the dependent variable. Return on Asset (ROA) is used to measure profitability meanwhile capital adequacy ratio, liquidity ratio , non performing loan ratio and interest margin are used to measure liquidity management. Descriptive statistics, correlation analysis and regression analysis were employed to examine the effect of liquidity management on profitability. The results of correlation analysis depict positive association between return on asset and capitalization ratio, interest meanwhile negative relationship was identified between capital adequacy ratio and return on asset. The results of regression analysis indicate that liquidity impacts on profitability significantly. Therefore, the present study recommends the bank managers to have clear understanding of balancing liquid assets and long term assets for generate more profit day by day.

Keywords: Keywords: Liquidity management, profitability, capitalization ratio, interest margin, capital adequacy ratio