Liquidity Risk and its Impact on Financial Performance of Financial Institutions in Pakistan

Abstract

The 2007-08 financial crisis highlights the significance of sound liquidity management. Liquidity risk is one of the key issues for financial institutions. An organization with a strong asset base, adequate capital and earning may fail if not sustained with good liquidity positions. This study attempts to empirically examine the impact of liquidity risk on the performance of selected banks operating in Pakistan. The panel data over a period of 2006-2015 was collected from the yearly published financial statements of banks working in Pakistan. The data was examined through regression model. Bank size, nonperforming loan ratio and capital adequacy ratio were used as surrogate variable for liquidity risk. The profitability of the selected banks was measured by taking the ratio of return on assets. The results of the regression model show a major impact of liquidity risk on the performance of Banking Institutions. The influence of the capital adequacy ratio and bank size was found significant and positive, while the influence of the nonperforming loan ratio proved insignificant. This study helps to understand the important parameters of liquidity risk and their influence on bank profitability. This study is valuable for risk managers to alleviate liquidity risk by having satisfactory liquid assets. This minimizes the liquidity gap and dependency of the financial institutions on the repo market.

The Effect Of Csr; Credit Interest; And Bank Size On Financial Performance.

“…Besides being able to gain trust, the greater of the size of the company, indicating the company can be good or optimal in using company assets so that it can increase the company's profitability which can have an impact on increasing the company's financial performance, and otherwise,the smaller of the companies size, that can indicate that the company has not been able to optimally use company assets to generate profitability for the company. This is in line with the results of research conducted by (Haryati and Widyarti, 2016) who said firm size has a significant positive influence on the financial performance with the result of significant value (0,009<0,05) and Coefficients 0,129 , (Ahmad and Jan, 2017) who said firm size has a significant positive influence on the financial performance with the result of significant value (0,000<0,05) and Coefficients 3,623879, (Mwangi, 2018), and (Novian, 2015) which state that firm size has a significant positive influence on the financial performance of banking companies with the results of significant value (0,000<0,05) and Coefficients 2,426. But it isn't in line with the results of the research that conducted by (Isbanah, 2015) which thatstates the company size has a negative impact on the company's financial performance with the results of significant value (0,048<0,05), and Coefficients -3,548.…”

“…And otherwise, the smaller or lower the total assets produced by a company, then it indicates the smaller the size of the company. (Ahmad and Jan, 2017)…”

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“…To test the effect of sport's results on the stock markets, researchers used many quantitative methods including generalized autoregressive conditional heteroskedasticity model (GARCH) (Beer & Lin, 2019;Kashif et al, 2020), linear regression model (Graziano & Vicentini, 2017) and event study (Asim et al, 2021;Galloppo & Boido, 2020;Škrinjarić & Barišić, 2019). The method used in this study, however, was the event study because the population size was small (trading days of the Indian team matches in the world cup) and thus, the other methods used in the literature cannot be utilized.…”

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