The Impact of Liquidity on Profitability of Commercial Banks in Liberia

Abstract

This study analyses the impact of liquid asset holdings on Commercial Banks in Liberia profitability. Using the regression analysis, this study analyzes the profitability of commercial banks using balanced data over the period of 2006-2011. The study used the liquidity asset and liquidity assets for estimating liquid asset and profitability relationship. The estimated relationship between liquid assets and bank profitability was as expected. Coefficients for the liquid assets ratio, its square, business cycle, and its product of interactive business cycle and regulation were positive and also statistically significant. The regulation coefficient was though negative. As expected, we find evidence of a non‐linear relationship between profitability and liquid asset holdings. An important finding of this study is that the business cycle of a commercial bank significantly affects it profit. The coefficient of regulation is negative and significant. Therefore if regulators reduce the constraints imposed on banks, banks obtain profit. The coefficient of the deposit ratio is positive and highly significant. A bank with a more deposit is able to be more profitable. The coefficient of loan asset ratio is positive and significant and this positive effect implies that banks with a high proportion of loan asset ratio have a higher profitability. In addition, an important finding of this study is that the business cycle significantly affects bank profits. Business cycle is estimated to have a positive and statistically significant impact on bank profitability