Proposal B 2022151084 BM

Term Paper Proposal
FIN4204
Bank Management & Financial Services
Topic: Factors Contributing to Liquidity Risk of Commercial Banks

in Bangladesh
Submitted to
Md. Nahid Alam
Assistant Professor
Department of Business Administration in Finance and Banking

Faculty of Business Studies
Bangladesh University of Professionals
Submitted by
Faika Nawar Noor
ID: 2022151084
Batch: 2020
Section: B
Department of Business Administration in Finance and Banking

Faculty of Business Studies
Bangladesh University of Professionals
Submission Date: 24th August 2023

Factors Contributing to Liquidity Risk of Commercial Banks in Bangladesh
Introduction
Szajt, 2015 in his research described how the aftermath of the subprime crisis caused a paradigm
shift in the perception of liquidity risk, making it a major consideration in banking operations.
Before the outbreak seen in the period of subprime crisis determinants of liquidity risk were not
given much attention.
Liquidity is the ability of a financial intermediary or bank to keep a certain balance all the time by
managing the inflows and outflows efficiently (Vento & Pasquale, 2009). One of the most difficult
responsibilities for financial intermediaries like banks is managing liquidity risk. Considering that
banks are generally tasked with supplying liquidity in the financial market, managing the necessary
liquidity position and reducing liquidity risk is crucial for everyday operation. The discrepancy
between the fund's supply and demand results in a liquidity crisis. Banks accumulate funds in a
variety of ways like deposits, credit repayments, and short-term borrowing from the money market
and the central bank. Customer withdrawals, credit facilities and other expenses raise demand for
funds. Following the global financial crisis of 2007, the Basel Committee on Banking Supervision
developed policies to manage banks' systematic risks, including liquidity risk, in order to avoid
bankruptcy.
The study will analyze the effect of bank-specific and external factors on the liquidity risk of
commercial banks in Bangladesh. The study shall be conducted using 10 banks data from 2017-
2022, and panel data will be used to conduct the regression analysis.
Problem Statement
Liquidity risk is getting worse for Bangladesh's banking industry. A number of factors
continuously lead to a mismatch between the maturities of assets and liabilities of commercial
banks. If deposits are abruptly withheld or lending declines, this imbalance makes it challenging
for banks to fulfill their short-term obligations. The stability of the financial system is in jeopardy
due to the banking industry's rising liquidity risk. It might result in bank failures, which would
then possibly hurt the real economy.
The projected outcomes of the study will provide a better understanding of the variables
influencing liquidity risk in Bangladesh’s banking industry.
Objectives
The study aims to investigate the determinants of banks' liquidity risks using panel data of 10 DSE
listed banks for 5 consecutive years from 2017 to 2022. It will focus on-
❖ Determining the factors influencing liquidity risk in Bangladeshi commercial banks.

❖ Evaluating the relative significance of these variables.
❖ Investigating how these elements affect the Bangladeshi commercial banks' liquidity risk.
Literature Review
According to Chowdhury et al., 2019 liquidity risk arises as a result of liquid assets fail to meet
liabilities. If a bank's customer withdrawal rate is high, it must retain a sufficient amount of liquid
assets on hand (Greuning & Iqbal, 2008).
Research of the liquidity risk management of conventional and Islamic banks in Pakistan from
2007 to 2010 found that size, CAR and ROE have a positive relationship with liquidity risk. NPLs,
on the contrary, have a negative relationship with liquidity (Iqbal, 2012).
According to studies on the liquidity positions of conventional and Islamic banks in Bangladesh,
Islamic banks are in a better position than conventional banks in both the short and long term
(Islam and Chowdhury, 2007).
Akhtar et al., 2011 investigated the relationship between liquidity risk and several bank-specific
variables such as return on equity, return on assets, bank size, capital sufficiency, and so on using
descriptive correlations and regression analysis. The study discovered that there are positive
relationships between the bank's size and liquidity risk. The capital adequacy ratio has also been
demonstrated to be substantial for traditional banks and insignificant for Islamic banks.
Ahamed, 2021 conducted a study to assess the bank-specific and external factors that affect the
liquidity risk in commercial banks in Bangladesh. He concluded that asset size, a bank-specific
indicator, has a negative relationship with liquidity risk. The larger the bank, the stronger the
liquidity position and the smaller the danger of liquidity. Return on equity and capital adequacy
ratio is associated with a positive but insignificant relationship with the liquidity risks. When it
comes to macroeconomic factors, inflation has a negative impact on liquidity risks, whereas GDP
and Domestic credit has a favorable impact.
A study by Zaghdoudi et al., 2017 discovered that the liquidity risk of Tunisian banks is determined
by internal factors such as loans and advances, bank size, and so on. Among macroeconomic
factors, economic growth plays a significant positive impact whereas inflation has a negative and
negligible impact on the liquidity risk of Tunisian banks.
Rauch, Steffen, Hackethal, and Tyrrel (2010) investigate the factors of liquidity risk as well as the
determinants of liquidity production. Their findings suggest that macroeconomic characteristics
and monetary policy are the most important determinants of liquidity generation, with no
substantial relationship between liquidity creation and bank-specific variables such as size and
performance. Bunda and Desquilbet (2008) conducted research on 1107 commercial banks from
36 emerging economies and discovered that capitalization, as defined by the equity-to-total-assets
ratio, has a significant and positive association with all liquidity metrics studied as well as a
significant relationship with the inflation and growth rates.
Based on the literature reviews of the previous studies this study will adopted the following
research hypotheses:
1. Ha1: There is both positive and negative relationship between the size of the bank
and liquidity risk.
2. Ha2: There is a positive relationship between the ROE of the bank and liquidity
risk.
3. Ha3: There is a negative relationship between the NPL of the bank and liquidity
risk.
4. Ha4: There is a positive relationship between the capital adequacy ratio of the bank
and liquidity risk.
5. Ha5: There is both positive and negative relationship between loans to advances
ratio of the bank and liquidity risk.
6. Ha6: There is a negative relationship between the inflation and liquidity risk
7. Ha7: There is a positive relationship between the GDP and liquidity risk.
Research Methodology
A. Data & Variables
This research’s data will consist of 5 years of data from 2017 to 2022 of 10 DSE listed
commercial banks of Bangladesh. The bank specific data’s will be collected from the
annual reports of the banks and Inflation and GDP data shall be collected from Bangladesh
government portal. So, all the data will be collected from secondary sources. A total of 8
variables have been selected including the dependent variable, liquidity risk. The bank
specific variables are asset size, non-performing loans, return on equity, capital adequacy
ratio and loans/advances ratio. GDP growth rate and inflation rate shall be used as
macroeconomic variables.
B. Empirical Model & Tests
The specification of the empirical model:
Y = β0+ β1X1+ β2X2+ β3X3 + β4X4+ β5X5+ β6X6 + β7X7 + €
Where,
Y= Liquidity risk
β0= Constant
β1-to β7= Regression co-efficients of independent variables
€= Error term
The variables and the proxies considered for the study are:
Table 1: Variables and the proxies used in this study
Variable Symbol Proxies Hypothesis

Relationship
Liquidity Risk Y Liquid asset / Total N/A

asset
Size of Bank X1 Logarithm of total Positive/negative

asset
ROE X2 Net income/ Total Positive

equity
NPL X3 Bad debt/Loan and Negative

advances
Capital adequacy X4 (Tier 1 capital + Positive

ratio Tier 2 capital ) /
Risk weighted asset
Loans to advances X5 Loans/advances to Positive/negative

ratio assets
Inflation X6 - Negative
GDP growth X7 Real GDP growth Positive
rate
Researchers often employ methods such as Pooled Ordinary Least Squares (POLS), the fixed-
effect model, the random effect model, and others to analyze panel data. When the number of
independent variables is determined while all the variables are represented as ratios, the fixed-
effect model proves to be the most effective in regression analysis and variance analysis. The
number of independent variables is fixed in this study, however, not all of the terms are stated as
ratios Hausman test is carried out to confirm that the Random Effect Model is more accurate in
this dataset. Aside from this, for robustness testing, POLS (Pooled Ordinary Least Squares) has
also been utilized in the research.
References
Akhtar, M. F., Ali, K., & Sadaqat, S. (2011). Liquidity risk management: a comparative
study between conventional and Islamic banks of Pakistan. Interdisciplinary journal of
research in business, 1(1), 35-44
Bunda, I. (n.d.). (PDF) The Bank Liquidity Smile Across Exchange Rate Regimes.
ResearchGate. Retrieved August 24, 2023, from
https://www.researchgate.net/publication/23546785_The_Bank_Liquidity_Smile_Across
_Exchange_Rate_Regimes
Greuning, H. V., & Iqbal, Z. (2008). The World Bank, Washington, D.C.
https://www.researchgate.net/publication/330776398_Liquidity_Risk_Management_of_I
slamic_Banks_in_Bangladesh
Iqbal, A. (2012). Study of the liquidity risk position of Pakistani Conventional and Islamic
Banks. Global Journal of Management and Business Research.
Islam, M. M. & Chowdhury, H. A. (2007). A Comparative Study of Liquidity Management
of an
Islamic Bank and a Conventional Bank: An evidence from Bangladesh. Journal of
Islamic
Economics, Banking and Finance, 5(1), 89-108
Rauche, C., Steffen, Hackethal, A., & Tyrell, M. (2023, January 13). Savings Banks,
Liquidity Creation and Monetary Policy. ResearchGate. Retrieved August 24, 2023, from
https://www.researchgate.net/publication/228639597_Savings_Banks_Liquidity_Creatio
n_and_Monetary_Policy
Szajt, M. (2015, December 11). (PDF) Determinants of liquidity risk in commercial banks
in the European Union. ResearchGate. Retrieved August 24, 2023, from
https://www.researchgate.net/publication/286459307_Determinants_of_liquidity_risk_in
_commercial_banks_in_the_European_Union
Vento, G. A. (2009). "Bank liquidity risk management and supervision: which lessons from
recent market turmoil. ResearchGate.
https://www.researchgate.net/publication/228622771_Bank_Liquidity_Risk_Managemen
t_and_Supervision_Which_Lessons_from_Recent_Market_Turmoil
Zaghdoudi, K., & Hakimi, A. (2017). The determinants of liquidity risk: Evidence from
Tunisian banks. Journal of Applied Finance and Banking, 7(2), 71.

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Term Paper Proposal

Topic: Factors Contributing to Liquidity Risk of Commercial Banks

Md. Nahid Alam

Department of Business Administration in Finance and Banking

Faika Nawar Noor

Department of Business Administration in Finance and Banking

Submission Date: 24th August 2023

❖ Determining the factors influencing liquidity risk in Bangladeshi commercial banks.

Table 1: Variables and the proxies used in this study

Variable Symbol Proxies Hypothesis

Liquidity Risk Y Liquid asset / Total N/A

Size of Bank X1 Logarithm of total Positive/negative

ROE X2 Net income/ Total Positive

NPL X3 Bad debt/Loan and Negative

Capital adequacy X4 (Tier 1 capital + Positive

Loans to advances X5 Loans/advances to Positive/negative

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