THE IMPACT OF LIQUIDITY RISK ON PERFORMANCE OF COMMERCIAL BANKS IN NEPAL

Abstract

Performance of commercial banks is a subject of concern to all the stakeholders. Liquidity risk and performance are considered to be two important concepts globally. The purpose of this study is to examine the impact of liquidity risk on performance of commercial banks in Nepal. This study found that with decrease in liquidity risk the performance of commercial bank also decreases. This study used accounting based measure to evaluate the performance of commercial banks which include Return on Asset (ROA), Return on Equity (ROE )and Net Interest Margin (NIM) and Funding Gap Ratio (FGAPR), Liquidity after Loan to Deposit Ratio (LALDR) and Liquid Asset to Total Deposit (LATD) as a measure of liquidity risk. This study employed annual data from 2004 to 2019 and used fixed effect regression model to evaluate the impact of liquidity risk on performance. This study found that Funding Gap Ratio has negative impact on ROA whereas it has no impact with other performance measures. Similarly, Liquidity after Loan to Deposit Ratio and Liquid Asset to Total Deposit has negative impact on ROA and NIM. The study found no impact of liquidity risk measures on performance measured by ROE. This leads to conclusion that with decrease in liquidity risk performance of commercial banks in Nepal decreases.