The Impact of Liquidity on Performance of Commercial Banks in Ghana
The Impact of Liquidity on Performance of Commercial Banks in Ghana

Summary/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.

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