Md. Shafiqul Islam :
Banks are the lifeblood of today’s economy. Banks are crucial in mobilizing economic resources. The performance of banks has a significant impact on overall economic performance. Liquidity and profitability are vital in the banking industry. The bank will be unable to serve daily activities if it does not maintain adequate liquid resources. Excess liquidity will also lead to lower profitability. I have a study which uses financial information from 2010 to 2019 from the selected banks. The study mainly focuses on the private commercial banks of Bangladesh. Deposits, loans, and advance and net profit are the variables I focused on for performance analysis.
As per outcomes of the performance analysis, profitability ratios like ROA and ROE are on the declining trend. The Loan-to-Deposit Ratio (LDR) is almost stable throughout the year in the banking sector, with no significant fluctuations. A linear regression model has been used to discover the association between loans and advances and net profit. It demonstrates a positive favorable correlation between the variables. The result shows that the banking industry in Bangladesh is heavily reliant on loans and advances for its profitability. If the volume of loans and advances rise by 1 BDT, the net profit rises by 0.03 BDT. It concludes that commercial banks in Bangladesh should be more efficient in managing their resources. Banks should mitigate their cost-to-income ratio (CIR); while incentives should be provided for boosting profitability ratios.
In recent years, financial institutions all over the world are undergoing a significant change. As a financial center, the banking industry confronts several challenges, including advanced technology and increased market competition as a consequence of this changing shift. For this reason, preserving the balance between liquidity and profitability has become a significant problem for banks to stay competitive in the stock market. Nowadays, excessive competition in the monetary and financial markets put various pressures on banks to control liquidity and improve monetization.
Also, technological advances, communication systems, and ultra-fast data processing systems create opportunities for providing a diversity of services through increased productivity and electronic means. Thus, to balance a bank’s efficiency and risk, shareholders and depositors need to improve their satisfaction by maximizing profits and ensuring a return on capital. The cash or cash equivalent used in a day-to-day business that responds to a short-term operating activity is called liquidity.
Profitability is more critical due to convertibility, which is the quality that makes it possible to convert money and other financial instruments into liquidity. The study stressed that the value of profitability does not mean that more liquidity is valuable. Therefore a low-profit margin implies poor management that makes investors hesitant to invest capital in businesses because there is a chance of losses.
Various authors and researchers have conducted several studies to investigate the impact of liquidity on the banking industry’s profitability. Surprisingly, the relationship between liquidity and profitability remains ambiguous in many studies. Some researchers have discovered a positive correlation, while others have discovered a negative correlation. Consequently, some of them have not found any correlation, and others have found both positive and negative outcomes. In their reports, several authors explained that liquidity has a positive profitability effect.
According to Liability Management theory, banks can fulfill liquidity needs by borrowing in the money and capital markets. The basic commitment of this hypothesis was to consider both sides of a bank’s balance sheet as sources of liquidity.
According to Anticipated Income theory, concurring to these hypothesis investors once more started to see at their advance portfolio as a source of liquidity. This theory empowered bankers to treat long-term advances as potential source of liquidity. Utilizing the anticipated income theory, these credits are regularly paid off by the borrower in an arrangement of installments. Seen in this way, the bank’s credit policy gives the bank with continuous flow of funds that adds to the bank’s liquidity. In addition, indeed in spite of the fact that the advances are long term, in a liquidity emergency the bank can offer the credits to get required cash in secondary markets,
In Bangladesh, it is the major influential factor that affects almost everything from the people’s lifestyle to business policy. Other reasons may be loan defaults, inefficiency in the workforce, lack of profitable investment opportunity, inefficient management of liquidity, increased interest rate and so on. Also, I can notice an excellent positive relationship of net profit with loans and advances from the analysis. In contrast, maintaining a higher amount of liquidity may result in lower profitability. So, liquidity should be carefully maintained and efficiently used. Also, proper policy compliance will bring good results.
(Md. Shafiqul Islam is Assistant Professor, Dept. of Accounting & Information Systems, Jatiya Kabi Kazi
Nazrul Islam University).
