Effects of liquidity on the profitability of banks listed on the Ghana stock exchange

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Liquidity management is always proven to be one of the essential determinants of the survival of every financial institution, and its impact on profitability. This is a difficult management function since there is no linear determinant or central bank policy on required threshold of liquidity a bank has to maintain, per its size, in order to remain sustainable in operation. This has become necessary that every bank will require its own liquidity management policy. The study examines the threshold of liquidity a bank should hold at any given time to remain sustainable in operation, and its impact on profitability using listed financial institutions on the Ghana Stock Exchange as the study context. Specifically, the objectives of the study were to investigate the effect of liquidity on performance of financial institutions and to investigate whether the threshold of bank cash has an effect on bank’s profitability. Data for the study was collected from the Bank of Ghana and the published financial statements of listed banks. The study was based on a sample of 7 listed banks over a 10 year period from 2010 to 2019 with data arranged in the form of a panel. Data was analysed using descriptive statistics, correlation analysis and regression. Profitability of listed banks will be measured using Return on Asset (ROA) and Return on Equity (ROE) indicating the dependent variables. Liquidity will be measured using the following ratios; Loan to Deposit Ratio (LDR), Cash to Deposit Ratio (CDR), Cash Ratio (CHR) and Bank Size will serve as a control independent variable. Liquidity measures the ability of banks to meet short-term obligation or commitments when they fall due. The profitability of a bank is its ability to generate revenue above its costs (Lartey et al. 2013). The study recommends that for sustainable operation and profitability to be achieved, board of directors and top financial managers of banks should devise more efficient ways which can ensure that at all times there will be an equitable balance between the cash the banks hold as against the deposits they keep for their customers.
A thesis submitted to the school of graduate studies, Kwame Nkrumah university of science and technology in partial fulfilment of the requirements for the award of master of science in accounting and finance