IOSR Journal of Economics and Finance (IOSR-JEF)

e-ISSN: 2321-5933, p-ISSN: 2321-5925.Volume 13, Issue 1 Ser. V (Jan. – Feb. 2022), PP 69-73
www.iosrjournals.org

A Study on Liquidity Management of Commercial Banks

in Nepal (With refrence to Samina bank ltd, Nabil bank
ltd and Kumari Bank ltd)
Ram Prasad Soni
Research Scholar,University Department of Commerce and Business Administration, Lalit Narayan Mithila
University, Kameshwar nagar,Darbhanga.!!

Abstract
The study examines the liquidity management through the comparative analysis of commercial banks namely
MBL, CCBL and CBL from the period 2013/2014 to 2017/2018. The selection criterion is based on judgmental
sampling. The independent variable includes CD ratio, CAR, NPL, and ROA. The dependent variable includes
the liquidity ratio which is the measure of the most liquid assets of the banks. The analysis is done using the
ratio analysis of the averages of the variables involves along with the descriptive and analytical analysis.
The ratio analysis shows that better liquidity position of all the three banks. This shows that they have more of
the liquid assets to pay off its obligations. The CD ratio of sample banks is within bracket or less than 80% and
they have been able to meet NRB requirement. The ROA along with CAR shows the insignificant positive
relation with liquidity ratio.
(Key word: liquidity, commercial bank, descriptive, analytical, ratio)

I. Introduction
Liquidity also means the ability to finance the increase in assets and meet liabilities when they due fall
without any unexpected losses, and so the efficient management of liquidity in the bank help to make sure that
the bank is able to meet the incurred cash, which are usually uncertain and subject to external factors and to the
behavior of other agents. The liquidity management is a vital factor in business operations. For the very survival
of business, the firm should have requisite degree of liquidity. It should be neither excessive nor inadequate.
Excessive liquidity means accumulation of ideal funds. Which may lead to lower profitability, increase
speculation, and unjustified extension. Whereas inadequate liquidity result in interruptions of business
operations. A proper balance between these two extreme situations therefore should be maintained for efficient
operation of business through skill full liquidity management.
The focus of this study was to examine the effect of liquidity risk on financial performance of
commercial banks in Nepal. The period of interest was between year 2005 and 2014 for all the 27 registered
commercial banks in Nepal. Liquidity risk was measured by cash reserve ratio (CCR) and net stable funding
ratio (NSFR) while financial performance by return on equity (ROE). Data was collected from commercial
banks’ financial statements filed with the Central Bank of Nepal. Panel data techniques of random effects
estimation and generalized method of moments (GMM) were used to purge time-invariant unobserved firm
specific effects and to mitigate potential endogeneity problems. Pair wise correlations between the variables
were carried out. Wald and F- tests were used to determine the significance of the regression while the
coefficient of determination, within and between, was used to determine how much variation in dependent
variable is explained by independent variables. Findings indicate that NSFR is negatively associated with bank
profitability both in long run and short run while CCR does not significantly influence the financial performance
of commercial banks in Nepal both in long run and short run. However, the overall effect was that liquidity risk
has a negative effect on financial performance. It is therefore advisable for a bank’s management to pay the
required attention to the liquidity management.

II. Literature Review

The International Accounting Standards (IFRS, 2006) indicate the fact that liquidity refers to the
available cash for the near future, after taking into account the financial obligations corresponding to that period.
Liquidity risk consist in the probability that the organization should not be able to make its payments to
creditors, as a result of the changes in the proportion of long term credits and short term credits and the
uncorrelation with the structure of organizations liabilities (Stoica, 2000)

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 A Study on Liquidity Management of Commercial Banks In Nepal (With refrence to Samina ..

Adebayo et al. (2011) examined liquidity management and commercial banks’ profitability in Nigeria.
Findings of this study indicate that there is significant relationship between liquidity and profitability. That
means profitability in commercial banks is significantly influenced by liquidity and vice versa.
Nimer (2015) sought to reveal the relationship between liquidity and profitability. The main results of
the study demonstrate that each ratio (variable) has a significant effect on the financial positions of enterprises
with differing amounts and that along with the liquidity ratios in the first place.
Arif (2012) tested liquidity risk factors and assessed their impact on (22) of Pakistani banks during the
period (2004-2009). Findings of the study indicate that there is a significant impact of liquidity risk factors on
the banks profitability, where an increase in deposits lead to increasing in the bank’s profitability in terms of
reducing dependence on the central bank in meeting the customers’ obligations, and profitability is negatively
affected by the allocation of non-performing loans and liquidity gap. Profitability ratios also play an important
role in the financial positions of enterprises.
"A liquidity risk management involves not only analyzing banks on and off-balance sheet positions to
forecast future cash flows but also how the funding requirement would be met. The later involves identifying the
funding market the bank has access, understanding the nature of those markets, evaluating banks current and
future use of the market and monitor signs of confidence erosion. Bank's Liquidity Risk Management
Procedures should be comprehensive and holistic. At the minimum, they should cover formulation of overall
liquidity strategy, risk identification, measurement, and monitoring and control process." (Nepal Rastra Bank ,
2010: 22)
"Solvency and liquidity risk management is a process that enables shareholders of the bank to
maximise their profit without exceeding an acceptable risk. One of the most important objectives in banking
operations is to choose the most appropriate ratio between the risk level and the profit rate" (Jasienė, 2012)

III. Objectives of the study

The main objective is to familiarize with the overall liquidity management practice in the Mega Bank Limited,
Civil Bank Limited and Century Bank Limited. The specific objectives can be outlined as under:
 To analyze the impact of Credit Deposit Ratio (CDR) on Return on Assets (ROA).
 To identify the effect of Capital Adequacy Ratio (CAR) on Return on Assets (ROA).
 To find out the impact of Cash Reserve Ratio (CRR) on ROA.

IV. Hypothesis
H01: There is no significant difference between CDR and ROA.
H02: There is no distinct difference between CAR and ROA.
H03: There is no significant difference between CRR and ROA.

V. Research Methodology
5.1 Research Design
Research is conducted on three commercial banks in Nepal which include Mega Bank Nepal(MBNL), Civil
Bank ltd(CBL) and Century Bank ltd (CBL). The reason for this study is to decide the impact of liquidity
administration on productivity in deposit money bank performance. Data is taken from financial annual reports
of banks for the period of 10 years 2010-2019. It is Descriptive in nature and makes use of quantitative analysis.
Our main focus is Profitability and Liquidity.
Profitability: There are various methods used for measuring profitability of a bank. For the purpose of this study,
the profitability of these banks will be determined using the return on asset (ROA)
Liquidity: The liquidity will be calculated using cash reserve ratio (CRR), credit deposit ratio (CDR) and capital
adequacy ratio (CAR).
5.2 Populations and Samples
This study is based on secondary data which has been collected from banks annual reports. Among 27
commercial banks 3 Joint Venture banks have been randomly selected for study. They are Mega Bank
Nepal(MBNL), Civil Bank ltd(CBL) and Century Bank ltd (CBL).
5.3 Research Tool and Instrument
For the selected topics “Ratio Analysis” could be the best mathematical tool for the evaluation and verification
of data in systematic way. As well as the essential statistical tool such as correlation analysis, test statistics, and
stress testing have been used for the relevant analysis of result.
Research variables
The research variables of the study such as liquidity ratio, credit deposit ratio, capital adequacy ratio and return
on asset are mainly related with the financial fluency of the selected banks. Other variables are also used where
considered necessary.

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 A Study on Liquidity Management of Commercial Banks In Nepal (With refrence to Samina ..

Liquidity ratio
The liquidity risk of the commercial banks is measured using liquid asset to total assets. The high figure of ratio
shows the better liquidity position. The ratio measures capacity to meet immediate payments of depositors.

Liquid asset
Liquid Asset to Total deposit =
Total Deposit
CD ratio
The CD ratio refers to the credit-deposit ratio in banking parlance. It tells us how much of the money banks have
raised in the form of deposits has been deployed as loans. ... A high CD ratio would mean strong demand for
credit in an environment of relatively slower deposit growth.

Total credit
Credit Deposit Ratio(CDR) =
Total Deposit

Capital Adequacy Ratio

A Capital Adequacy Ratio is a measure of a bank’s capital. It is expressed as a percentage of a bank’s risk
weighted credit exposures. This ratio is used to protect depositor and promote the stability and efficiency of
financial systems around the world.

Total capital fund

Capital Adequacy Ratio (CAR) =
Total risk weigh ted exposures

Return on asset
The return on assets (ROA) which is often called the firm’s return of total assets measures the overall
effectiveness of management in generating profit with its available assets.
We compute the relationship between net profit and assets with the help of the following formula:

Net Profit after Taxes

Return on Assets (ROA) =
Total Assets

VI. Data Presentation And Analysis

Statistical tools are used to draw the relationship between different variables related to the study topic. In this
study, different relationships have been calculated with the help of correlation analysis of NBL, KBL and SBL.
6.1 Descriptive Analysis
The descriptive statistics of the explanatory and explained variables in this study are presented in Table 1. It is
based on a panel data set organized from three commercial banks operating in the Nepalese financial market
during the period from 2010 to 2020. Looking at them, generally, the statistics indicate a wide variability exist
in the indicators of liquidity risk management of commercial banks.

Descriptive Statistics
N Mean Std. Deviation
ROA 30 1.7913 .64328
CDR 30 82.1860 7.94113
CAR 30 13.2907 3.52873
CRR 30 14.5707 8.97480
Valid N (listwise) 30

The ROA has a mean value of 1.7913% with standard deviation of .64328%.Credit Deposit Ratio
(CDR) variable has the mean value of 82.1860%. Standard deviation of CDR is 7.94113%. Cash adequacy
ratio(CAR) has a mean of 13.2907%.ir has standard deviation of 3.52873%.Cash Reserve Ratio (CRR) has a
mean of 14.5707%. It has standard deviation of 8.97480% which also show there was low variability than all
other variables used in the study.

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 A Study on Liquidity Management of Commercial Banks In Nepal (With refrence to Samina ..

Correlations
ROA CDR CAR CRR
Pearson Correlation 1 -.533** -.275 -.303
ROA Sig. (2-tailed) .002 .141 .104
N 30 30 30 30
Pearson Correlation -.533** 1 .605** .482**
CDR Sig. (2-tailed) .002 .000 .007
N 30 30 30 30
Pearson Correlation -.275 .605** 1 .549**
CAR Sig. (2-tailed) .141 .000 .002
N 30 30 30 30
Pearson Correlation -.303 .482** .549** 1
CRR Sig. (2-tailed) .104 .007 .002
N 30 30 30 30
**. Correlation is significant at the 0.01 level (2-tailed).

From the table it is evident that there is a positive correlation of ROA and asset management while
negative correlation with the size, credit risk and operational efficiency. This indicates that with increase in asset
management, there has been increase in ROA. While the results show that with the rest of the variables
decreasing, there can be increase in ROA. Asset management has very strong positive correlation with ROA, as
it is logical that with increase in efficient asset management, the return on assets will be higher.

6.2 Regression analysis

The R square is a measure of the goodness of fit of the working capital management variables in explaining the
variations in profitability of commercial banks in Nepal. The regression analysis of ROA and ROE on Working
capital management has been separately analyzed below:

Model Summary
Model R R Square Adjusted R Square Std. Error of the
Estimate
1 .542a .294 .213 .57083
a. Predictors: (Constant), CRR, CDR, CAR

As per the results on table has a R square value of .213 meaning that 21.3% of the variation in the
dependent variable is explained by the independent variables while 78.7% is explained by other variables
outside the model. This indicated that our model is a strong predictor. The R-value of .294, which indicates that
there is a strong positive correlation between the dependent variable (ROA) and the set of independent variables.

ANOVAa
Model Sum of Squares Df Mean Square F Sig.
Regression 3.528 3 1.176 3.610 .027b
1 Residual 8.472 26 .326
Total 12.000 29
a. Dependent Variable: ROA
b. Predictors: (Constant), CRR, CDR, CAR

From the table above the value of F-stat is found to be 3.610 and is significant as the level of
significance is less than 5%. In addition, this indicates that the null hypothesis is rejected and alternative
hypothesis is accepted. Hence it was found that Bank size, Liquidity Risk, Asset management and operational
efficiency have impact on economic-based performance (ROA) of commercial banks.

Coefficientsa
Model Unstandardized Coefficients Standardized t Sig.
Coefficients
B Std. Error Beta
(Constant) 5.312 1.191 4.461 .000
CDR -.045 .017 -.555 -2.613 .015
CAR .021 .041 .114 .513 .612
CRR -.007 .014 -.098 -.484 .632
a. Dependent Variable: ROA

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 A Study on Liquidity Management of Commercial Banks In Nepal (With refrence to Samina ..

Thus, the analysis predicts the average ROA with about 90% explanatory power by the following model:
ROA = 5.312 + -0.045SIZE + 0.021CAR + -0.007+ еz
To assess the significance of each independent variable on the dependent variable ROA, the researcher has
established that bank size, asset management and credit risk were found to be significant and affect ROA as
their t-sig are less than 5%. However, operational efficiency has insignificant effect on ROA, as its t-sig is 0.632
(>5%). The bank size may have significant effect on the value of ROA because it measures the log of total
assets of the company and ROA value needs the usage of total assets value for its determination. Liquidity risk
may have some effect as it measures the reserve of the bank compared to the total loans. Since loans would
provision for interest, it would thus affect the net income and thus have an effect on the value of ROA. In the
same way, asset management involves the total assets of the banks and thus will have effect on ROA. However,
operational efficiency measures how able the bank is to meet up its operating expenses. Though operating
expenses affect the value of net income, however, this does not have direct link to the value of the ROA.

VII. Conclusion
The study examines the liquidity management through the comparative analysis of commercial banks
namely MBL, CCBL and CBL from the period 2013/2014 to 2017/2018. The selection criterion is based on
judgmental sampling. The independent variable includes CD ratio, CAR, NPL, and ROA. The dependent
variable includes the liquidity ratio which is the measure of the most liquid assets of the banks. The analysis is
done using the ratio analysis of the averages of the variables involves along with the descriptive and analytical
analysis.
The ratio analysis shows that better liquidity position of all the three banks. This shows that they have
more of the liquid assets to pay off its obligations. The CD ratio of sample banks is within bracket or less than
80% and they have been able to meet NRB requirement.
Correlation Analysis & t-test for correlation shows the CD ratio therefore hypothesis H1 and H3 are
accepted. The ROA along with CAR shows the insignificant positive relation with liquidity ratio. Hence the
hypothesis H2 and H4 are accepted.
The stress testing is used to develop scenarios of 5% 10% and 15% withdrawal of deposit and their
affect on liquidity ratio and CAR. It studies relationship of the financial variables and have become necessary
for the forward-looking assessments. Though 5% and 10% withdrawal of deposit reduces liquidity ratio and
CAR, They are within limit of NRB requirement i.e. 20% and 10% respectively. However, 15% withdrawal of
deposit of sample banks shows the sign of liquidity crunch and low capital level. Hence Stress testing alerts
bank management to be aware on adverse situations related to a several risks and provides an indication of how
much capital needed to absorb losses and liquidity required during the adverse situation. It is used to evaluate
the potential impact on a bank of a specific event and movement in a set of financial variables and its
applications are expanding.

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[7]. www.nabilbank.com.np
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[10]. www.nrb.org.np

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