Liquidity and bank profitability in Ghana

Abstract

Bank liquidity and profitability are of very great concern to stakeholders’ regulators/ supervisors, the public, depositors, borrowers, debt holders and shareholders. In performing their financial intermediation role, banks' must have an optimal trade-off between the profitability and firm value maximization objective of shareholders and liquidity objective of depositors. A critical understanding of the relationship between liquidity and profitability in banks is useful in determining the optimal trade-off. The study sought to establish the relationship between the liquidity and bank profitability of23 licensed Ghanaian banks over the ten-year period 2009-2018. The study employed correlation and regression analysis to study the relationship between profitability (ROA and ROE) and liquidity measures (loans-to-deposit ratio (LDR) and cash-to-deposit ratio (CDR). A pairwise correlation presents a negative relationship between profitability and liquidity. The regression analysis shows that the profitability ratios - ROA and ROE have a strong significantly negative and positive relationship with cash-to-deposit ratio (CDR) liquidity measure respectively. Further research is recommended on how to achieve the optimal liquidity level in banks. The result will help to solve the problem of excess liquidity and its reducing effects on profits, and arbitrary high profitability with its consequent reduction of liquidity position. I suggest that interested researchers should dwell on the same area of this research extensively using a wider data and area of coverage.