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The Impact of Liquidity on Performance of Commercial Banks in Ghana

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  • Richard Charmler
  • Alhassan Musah
  • Evans Akomeah
  • Erasmus Dodzi Gakpetor

Abstract

The concept of liquidity and profitability are two critical concepts in finance literature especially in banking sector. Finance assumes an inverse relation between liquidity and profitability even though several empirical studies indicate otherwise. The study examined the level of bank liquidity, the trend of banks liquidity and the impact of bank liquidity on profitability of commercial banks in Ghana. The study was based on a sample of 21 banks over a 10 year period from 2007 to 2016 with data arranged in the form of a panel. Data was analysed using descriptive statistics, correlation analysis and regression analysis. The results show that the average liquid assets to total assets for commercial banks is 20% whiles liquid assets cover over total interest bearing liabilities was 1.19. The results show that liquidity is positively associated with return on assets using both measures of bank liquidity. Regarding return on equity, there is a weak positive relationship between the ratios of liquid assets to total assets (LIDQ1). An insignificant negative relationship was observed between return on equity (ROE) and liquid assets to total interest bearing liabilities (LIQD2). On the control variables, the study reported a positive association between net interest margin, bank size, capital adequacy ratio, foreign ownership and bank profitability. The study implies that a pre-determined optimal level of liquid assets is needed by banks to enhance profitability. Thus, banks should determine the level of liquidity beyond which profitability will be reduced.

Suggested Citation

  • Richard Charmler & Alhassan Musah & Evans Akomeah & Erasmus Dodzi Gakpetor, 2018. "The Impact of Liquidity on Performance of Commercial Banks in Ghana," Academic Journal of Economic Studies, Faculty of Finance, Banking and Accountancy Bucharest,"Dimitrie Cantemir" Christian University Bucharest, vol. 4(4), pages 78-90, December.
    • Handle: RePEc:khe:scajes:v:4:y:2018:i:4:p:78-90
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    Cited by:

    1. Larissa Batrancea, 2020. "An Econometric Approach on Performance and Financial Equilibrium during the COVID-19 Pandemic," Ovidius University Annals, Economic Sciences Series, Ovidius University of Constantza, Faculty of Economic Sciences, vol. 0(2), pages 801-808, December.

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    More about this item

    Keywords

    Liquidity; commercial banks; profitability; Ghana;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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