The effect of liquidity on the banks’ profitability: empirical evidence from the commercial banks of Afghanistan

Abstract

The study aims to inspect liquidity's influence on the profitability of commercial banks in Afghanistan. Literature is available on the topic in developed and developing economies. But there is a lack of research on the relationship between liquidity and profitability in Afghanistan. Therefore, an attempt has been made to analyze the impact of liquidity management in the banking sector of Afghanistan. Based on the board in the banking frameworks, the new global monetary emergency is attentive to the importance of productive liquidity. The five-year data was collected from 12 commercial banks in Afghanistan from 2016 to 2020. We used OLS techniques for estimation. The study results show that the networking capital ratio has an insignificant effect on ROA. The current ratio positively and significantly affects ROA in the case of private commercial banks in Afghanistan. Based on the results, it is concluded that liquidity notably impacts commercial banks' profitability in Afghanistan. These findings suggest that commercial banks should manage their operational risk properly by diversifying their portfolio into return-generating assets, prudently controlling their operational risk, and reducing their leverage levels. The regulatory authority should expand its regulatory framework for the guidance and support of the banks.