Rabindra Kumar - Dissertation Final

THE IMPACT OF LIQUIDITY ON PROFITABILITY
OF COMMERCIAL BANKS IN NEPAL
A Dissertation Submitted to The Head of Research Department , Nepal Commerce

Campus in Partial Fulfillment of the requirement of Degree of Masters of Business
Studies (MBS)
Submitted by
Rabindra Kumar Karki

Roll No:
181/2019
Symbol Number: 11758/19
Registration No: 7-2-379-199-
2013
Kathmandu,
Nepal June, 2022
CERTIFICATION OF AUTHORSHIP
I hereby declare that the work reported in this thesis entitled “The Impact of Liquidity
on Profitability of Commercial Banks in Nepal” submitted to Office of the Dean,
Faculty of Management, Tribhuvan University, is my original work done in the form of
partial fulfillment of the requirement for the Degree of Master of Business Studies
(MBS) under the supervision of Lok Bahadur Rai of Nepal CommerceCampus, T.U.
………………………………
T.U. Reg. No: 7-2-379-199-
2013
Symbol No: 11758/019
Date: …………………..
RECOMMENDATION
This is to certify that the
Dissertation Submitted by:
Entitled:
THE IMPACT OF LIQUIDITY ON PROFITABILITY

OF COMMERCIAL BANKS IN NEPAL
(With reference to NABIL Bank, Standard Chartered Bank Ltd. & Everest Bank Ltd.
)
Has been prepared as approved by this Department in the prescribed format of the Faculty of
Management. This dissertation is forwarded for examination.
……...…….……....…… ….……………....………… ..……..…………….

Lok Bahadur Rai Asso. Prof. Dr.Jitendra Pd. Upadhyay
(Dissertation Supervisor) (Head of Research Department (Campus Chief)
& Dissertation Supervisor)
Report of Research Committee
Mr. Rabindra Kumar Karki has defended research proposal entitled “The Impact of
Liquidity on Profitability of Commercial Banks in Nepal” successfully. The research
committee hasregistered the dissertation for further progress. It is recommended to carry
out the work asper suggestions and guidance of supervisor Lok Bahadur Rai and submit
the thesis for evaluation and viva voce examination.
Dissertation Proposal Defended Date:
Name of Supervisor: Lok Bahadur Rai

Position: …………………… Dissertation Submitted
Date : Signature: …………………………………
Name of head of Research committee: Asso. Prof. Dr.Jitendra Pd. Upadhyay
Position: ………………………………… Dissertation Viva-Voce

Date: Signature: …………………………………..
Approval Sheet
We have examined the dissertation entitled “The Impact of Liquidity on Profitability

of Commercial Banks in Nepal” presented by Rabindra Kumar Karki for the degree
of Master of Business Studies (MBS). We hereby certify that the dissertation is
acceptable for the award of degree.
Lok Bahadur Rai

Dissertation
Supervisor
Madan Kadel
Internal Examiner
External Examiner
Signature:
Asso. Prof. Dr.Jitendra Pd. Upadhyay

Chairperson, Research Committee & Dissertation Supervisor
Date:
ACKNOWLEDGEMENTS
Accomplishment of beautiful work requires crystal heart, creative mind, hard labor,
dedication and commitments. Many helpful hands are needed to complete the work.
After completion of the work, immense joy can be experienced which I am doing
this time. I cannot be selfish with sole enjoyment. I must share it with all who are
equal candidates for the credit.
Firstly, it's my great honor to thank my thesis supervisor Lok Bahadur Rai also would
like to express sincere thanks to Prof. Dhruba Prasad Silwal Campus Chief of
Nepal Commerce Campus and Asso. Prof. Dr. Jitendra Prasad Upadhaya Head
of Research Department of Nepal Commerce Campus, the library staff of campus
who helped me to prepare this thesis and for valuable suggestion as well as the all
lecturers of Nepal Commerce Campus who insisted and guided me to complete this
research work. It was really gratifying to study 'The Impact of Liquidity on Profitability
of Commercial Banks in Nepal' with reference to Nabil Bank Ltd, Everest Bank Limited
and Standard Chartered Bank Nepal Limited. During the time of my study, I received a
great deal of assistance and assurance from various persons and institutions.
THANKING YOU!
Rabindra kumar karki

July, 2022
TABLE OF CONTENTS
Page No.
Title Page I
Report of Reserch Committee II
Approval Sheet III
Recommendation IV
Certification of Authorship V
Acknowledgements VI
Table of Contents VII
List of Tables VIII
List of Figures IX
Abbreviations X
Abstract XI
Chapter I: Introduction 1-14

1.1 Background of the Study 1
1.1.1 Development of Banking in Nepal 4
1.1.2 A Brief profile of Nabil Bank Limited 6
1.1.3 A Brief profile of Everest Bank Limited 8
1.1.4 A Brief profile of Standard Chartered Bank Limited 9
1.2 Problem Statement 10
1.3 Objectives of the Study 12
1.4 Research Hypothesis 13
1.5 Rational of the Study 13
1.6 Limitations of the Study 14
Chapter II: Literature Review 15-26
2.1 Conceptual Review 15
2.1.1 Concept of Liquidity 15
2.1.2 Importance of Liquidity 17
2.1.3 Capital Ratio 18
2.1.4 Investment Ratio 18
2.2 Review of previous Studies 19
2.2.1 Review of Articles and Journals 19
2.2.2 Review of Thesis 23
2.3 Research Gap 26
Chapter III: Methodology 28-34
3.1 Research Design 28

3.2 Population and Sample 28
3.3 Sampling Design 29
3.4 Nature and Sources of Data 29
3.5 Instrument of Data Collection 29
3.6 Methods of Analysis 30
3.6.1 Statistical Tools 30
3.6.2 Financial Tools 33
3.7 Research Framework 34
3.7.1 Independent variables 34
3.7.2 Dependent variables 34
3.8 Research Tools 34
Chapter IV: Results and Discussions 35-48
4.1 Introduction 35
4.2 Financial Tools 35
4.3 Statistical Tools 44
4.4 Test of Hypothesis 46
4.5 Major Findings 47
4.6 Discussion 48
Chapter V: Summary and Conclusions 59-64
5.1 Summary 50
5.2 Conclusions 52
5.3 Implications 53
REFERENCES
APPENDICES
LIST OF TABLES
Page No.
Table No.1 Return on Equity 35

Table No.2 Return on Assets 37
Table No.3 Capital Ratio 39
Table No.4 Investment Ratio 41
Table No.5 Liquidity Ratio 43
Table No. 6 Descriptive Statistics 45
LIST OF FIGURES
Page No.
Figure No.1 Return on Equity 36

Figure No.2 Return on Assets 38
Figure No.3 Capital Ratio 40
Figure No.4 Investment Ratio 42
Figure No.5 Liquidity Ratio 44
ABBREVIATIONS
Adj. : Adjusted
BFIs : Bank and Financial Institutions
CEO : Chief Executive Officer
Co. : Company
CR : Capital Ratio
CSR : Corporate Social Responsibility
C.V. : Co-efficient of Variation
D.F. : Degree of Freedom
DPR : Dividend Payout Ratio
DPS : Dividend per Share
EPS : Earning Per Share
FY : Fiscal Year
HBL : Himalayan Bank Limited
IR : Investment Ratio
JVBs : Joint Venture Banks
LR : Liquidity Ratio
MPS : Market Price Per Share
N : No. of Items
NBL : Nepal Bank Limited
NIBL : Nepal Investment Bank Limited
NRB : Nepal Rastra Bank
ROA : Return on Assets
ROE : Return on Equity
SCBNL : Standard Chartered Bank Nepal Limited
S.D. : Standard Deviation
SEBON : Security Board of Nepal
SEE : Standard Error of Estimates
SIB : Seeing is believing
Sig. : Significant
ABSTRACT
This study examines the impact of liquidity on profitability of Nepalese commercial

banks. Investment ratio, liquidity ratio and capital ratio are the independent
variables used in this study. The dependent variables are return on equity (ROE)
and return on assets (ROA). The secondary sources of data have been used from
annual reports of the banks and supervision report of Nepal Rastra Bank. The
regression models are estimated to test the significance and effect of bank liquidity
on performance of Nepalese commercial banks.
Correlation between capital ratio and return on equity found to be positive

indicating higher the capital ratio higher would be the return on assets. However,
the correlation between return on assets and liquidity ratio is found to be negative
indicating higher the liquidity in the bank lower would be the return on assets.
Further, the correlation is found to be negative for investment ratio with return on
assets. Beta coefficients for capital ratio, liquidity ratio and investment ratio are
negatively significant with bank performance, which indicate that increase in
liquidity ratio, capital ratio and investment ratio leads to decrease the performance
of the banks. Due to the lack of proper utilization of resources, unfair competition,
rules and regulation, Nepalese commercial banks couldn’t increase their
profitability as compared to increase in capital.
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CHAPTER - I
INTRODUCTION
1.1 Background of the Study
Bank liquidity refers to the ability of the bank to ensure the availability of funds to meet
financial commitments or maturing obligations at a reasonable price at all times. Bank
liquidity means a bank having money where they need it particularly to satisfy the
withdrawal needs of the customers (Wasiuzzaman & Tarmizi, 2010). Liquidity is a financial
term that means the amount of capital that is available for investment. Today, most of this
capital is credit fund. That is because the large financial institutions that do most investments
prefer using borrowed money (Felix & Claudine, 2008). Profitability and liquidity are
effective indicators of the corporate health and performance of not onlythe commercial
banks, but all profit-oriented ventures (Eljelly et al. 2004). These performance indicators are
very important to the shareholders and depositors who are major publics of a bank.
Through the financial inter-mediation role, the commercial banks reactivate the idle funds
borrowed from the lenders by investing such funds in different classes of portfolios. The
liquidity risk of banks arises from funding of long-term assets by short- term liabilities,
thereby making the liabilities subject to rollover or refinancing risk. Liquidity risk is usually
of an individual nature, but in certain situations may compromisethe liquidity of the financial
system. Liquidity risk management in banks is defined as the risk of being unable either to
meet their obligations to depositors or to fund increases in assets as they fall due without
incurring unacceptable costs or losses. Effective liquidity risk management helps ensure a
bank’s ability to meet its obligations as they fall due andreduces the probability of an adverse
situation developing (Ahmad, 2009).
A bank is responsible for the sound management of liquidity risk. A bank should establish a
robust liquidity risk management framework that ensures it maintains sufficient liquidity,
including a cushion of unencumbered, high quality liquid assets, to withstand a range of
stress events, including those involving the loss or impairment of both unsecured and secured
funding sources. Supervisors should assess the adequacy of both a
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bank’s liquidity risk management framework and its liquidity position and should take
prompt action if a bank is deficient in either area in order to protect depositors and to limit
potential damage to the financial system (Kumar & Yadav, 2013).
Banks face two central issues regarding liquidity. Banks are responsible for managing
liquidity creation and liquidity risk. Liquidity creation helps depositors and companies stay
liquid, for companies especially when other forms of financing become difficult. Managing
liquidity risk is to ensure the banks own liquidity so that the bank can continue to serve its
function (Vossenand & Ness, 2010).
In a report of Basel Committee on Banking Supervision in 2013, it has been stated that the
rapid reversal in market conditions illustrated how quickly liquidity can evaporate, and that
illiquidity can last for an extended period of time. The banking system came under severe
stress, which necessitated central bank action to support both the functioning of money
markets and, in some cases, individual institutions. In the aftermath of the crisis, there is a
general sense that banks had not fully appreciated the importance of liquidity risk
management and the implications of such risk for the bank itself, as well as the widerfinancial
system. As such, policymakers have suggested that banks should hold more liquid assets than
in the past, to help self‐ insure against potential liquidity or funding difficulties. This has led
to an international desire for common measures and standards for liquidity risk.
The performance of commercial banks can be affected by internal and external factors
(Kosmidou et al. 2008). These factors can be classified into bank specific (internal) and
macroeconomic variables. The internal factors are individual bank characteristics whichaffect
the bank's performance. These factors are basically influenced by the internal decisions of
management and board. The external factors are sector wide or country widefactors which are
beyond the control of the company and affect the profitability of banks. But this study is
concerned with the impact of liquidity on the performance ofcommercialbanks in Nepal. To
measure the profitability of commercial banks, there are variety of ratios used of which
Return on Asset, Return on Equity and Net Interest Margin are the major ones (Murthy &
Sree, 2003).
Liquidity risk is said to be assassin of banks. This risk can adversely affect both bank’s
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earnings and the capital. Therefore, it becomes the top priority of a bank’s management to
ensure the availability of sufficient funds to meet future demands of providers and borrowers,
at reasonable costs. Episodes of failure of many conventional banks from the past and the
present provide the testimony to this claim. For instance, as United States/U.S. subprime
mortgage crisis reached its peak in the years 2008/9 unprecedented levels of liquidity support
were required from central banks in order to sustain the financial system. Even with such
extensive support, a number of banks failed, were forced into mergers orrequired resolution.
A reduction in funding liquidity then caused significant distress. In response to the freezing
up of the interbank market, the European Central Bank and U.S. Federal Reserve injected
billions in overnight credit into the interbank market. Some banks needed extra liquidity
supports (Longworth, 2010; Bernanke, 2008).
It is evident that liquidity and liquidity risk is very emerging and important topic.
Therefore, banks and regulators are keen to keep a control on liquidity position of banks.
However, this fragility is also a source of efficiency. Diamond and Rajan (2001) argue that
the financial intermediation structure is efficient in that it disciplines banks when carrying out
their lending function. The threat of a run is an incentive for the bank to choose projects with
high return. More generally, this also suggests that an “even more liquid” bank might not
always be desirable for the efficiency of the financial system. Therefore, effective liquidity
risk management helps ensure a bank's ability to meet cash flow obligations, which are
uncertain as they are affected by external events and other agents' behavior and to keep their
optimal profitability.
In Nepalese context, Karki (2004) found that liquidity ratio was relatively fluctuating
over the period, return on the equity is found satisfactory and there is positive relationship
between deposits and loan advances. The recommendations made that are the existing
condition of the liquidity of the banking and financial institutions needs to be reduced
through an appropriate investment policy. Further, Joshi (2004) analyzed financial
performance through the use of appropriate financial tools and to show the cause of change in
cash position of the two banks in which the researcher stated that bank profitability uses the
return on assets, the return on equity and net interest margin. The study found that liquidity
and bank loan are positively related to bank profitability.
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Studies of Nepalese banks’ profitability are important as guidance towards enhancing

the economy since banks do contribute to economic growth and stability. Stability in the
banking sector helps to maintain stability in the economy (Baral, 2005).Few studies have
been conducted on determinant of profitability of the commercial banks in Nepal, for
example, Karki (2004) also found that the positive relationship between capital adequacy and
profitability, Joshi (2004) found that the liquidity and banks’ loan are positively related to
banks profitability and Maharjan (2007) revealed that the capital adequacy and liquidity is
positively associated with banks profitability.
The major purpose of the study is to examine the impact of bank liquidity on
profitability of commercial banks in Nepal. Specifically, it examines the effect of capital ratio,
investment ratio, liquidity ratio and quick ratio to return on assets and return on equity of
commercial banks of Nepal.
1.1.1 Development of Banking in Nepal
In the context of Nepal, The history of banking sector is rather more slow evolution.
Even now, the banking sector is still in the evolutionary phase. So far as banking is
concernedwith debt, we may go back in the Nepalese history, where a merchant namely
"Sankhdhar"is recorded. He was the person who alone paid all debts of the people existing in
the countryat that time. Since then he introduced a new era called "Nepal Sambat". This record
provesthe existence of money lending function at that time. During the course of
developmentof borrowing, we further come across the term "Tanka Dhari" at the end of the
14th century meaning money lenders. They are one of the 64 castes classified on the basis
ofoccupation.
In 1877 A.D., Tejaratha Adda was established by Ranodip sah. The main purpose of
this institution was to provide credit facilities for government staff and general public by
collecting gold and silver at 5 percent rate of interest. Tejaratha Adda did not use to accept
deposit, it only provided credit facilities. So, we cannot say, it had performed fully banking
transaction. But it played an important role towards the institutional development of banking
system in Nepal.
On the course of development of bank, Nepal Bank Limited was established in 1994 under
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the Nepal Bank Act 1994 (1938) as a commercial bank. NBL has been providing banking
services and facilities from 1994 B.S. up to now. Really, NBL is the first modern bank in the
history of banks in Nepal. Until mid-1940s, only metallic coins were used as medium of
exchange. So, the government felt the need of separate institution or body to issue national
currencies and promote financial organization in the country. Hence, the Nepal Rastra Bank
(NRB) Act 1955 was formulated and was approved by the government. Accordingly, the
Nepal Rastra Bank was established in 1956 A.D. as the central bank of Nepal. After the
establishment of NRB, the first five-year plan was introduced in the country. The
establishment of NRB set a milestone in the history of banking in Nepal. After this, a new way
of thinking and a new sort of spirit arose in the field of banking. NRB was established with an
objective of supervising, protecting and directing the functions of commercial banking
activities. Although NRB was established in 2012, it took entirely a decade to consolidate its
powers as the banker's bank and controller of the credit. NRB for the first time issued the
Nepali notes on 7th Falgun 2016.
In a view of the various development programs launched after the beginning of

planned development in the country, government established another commercial bank
Rastriya Banijya Bank in Public sector on 23rd January 1966 to provide banking facilities and
to help economic development.
The tasks of bank are very dynamic, complex and riskier. In this context, only local
commercial banks could not play their role in the development of modern banking. Realizing
this fact, the government felt that joint venture banks could contribute significantly in the
formation and mobilization of internal capital for trade and commerce. As management of
JVBs are mainly hold by foreign banks, it was felt some competitive advantages like
increased skilled personnel with modern banking knowledge, efficient banking services,
advance management, skills and an international network of bank branches. Accordingly,
government introduced new banking policy in 1980s. The policy allowed foreign banks to
operate as JVBs, provide autonomy to fix interest rate to a certain limit and introduced
auctioning of government securities. Thesereforms are considered partial liberalization and a
way to open economic policy.
As a result, the first JVB, Nepal Arab Bank Limited was established in 2041 (1985) under
6
the Commercial Bank Act 2031 (1974) and the Companies Act 2021 (1965). In short form, it
is called NABIL Bank. Nepal entered a new era of development following the historic
political changes with the restoration of parliamentary system of government based on multi-
party democracy in 1991 A.D. As an important strategy in resource mobilization, democratic
elected government has given high priority to foreign investment, private sector participation
and economic liberalization. In this context, the government encouraged foreign investment
in Nepal by providing attractive incentives and facilities with liberal and economic policy.
The importance attached to foreign investment was clearly reflected in the new constitution.
In the directive principles of the constitution, it is stated that a policy of attracting foreign
capital and technology will beadapted. When democratically elected government introduced
liberalization and open economic policy, the number of JVBs has increased rapidly. Apart
from JVBs, a numberof other financial institutions also emerged in the country.
It is clear that the growth of banks in Nepal is satisfactory. Certainly, it is not enough
satisfaction in comparison to other countries. First of all, the banks are not enough. Secondly,
the competition is not found in banking functions. Thirdly, the banks are increased in number
in urban areas only. Modern and joint investment banks are not established in rural areas.
Hence, the rural people are not getting banking services.
1.1.2 A Brief Profile of NABIL Bank Limited (NABIL)
Nabil is a milestone in the development of financial services industry in Nepal. Entry of

private sector in the domestic banking scene was marked with the establishment of
NabilBank in 1984 A.D. This began an era of customer centric banking. Until then products
and services were limited to basic financial intermediation, technological intervention was
virtually non- existent and there was limited public access to financial services. Charting
ways from such background, Nabil has redefined banking and brought about a paradigm shift
in the way banking is delivered in domestic market. To this day Nabil is righteously credited
for its pioneer role in shaping up a banking culture that has its corebuilt around service
excellence, is driven by technology and garnered through product innovation.
Nabil continues to maintain its recognition as the brand of choice across all strata of
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customers including retail, SMEs, large corporate, state-owned enterprises, not for profit
entities and multinational development agencies. The Bank continues in its endeavors
towards enhancing customer experience, adapting to technological developments and
reaching closer to people using alternate channels. The Bank creates and maintains customer
relationships based on trust and fair pricing, which it believes will lead to setting the highest
benchmark in domestic banking scene.
The Bank serves complete line of commercial banking products through branch
banking, treasury, trade, cards, remittance and investment banking. The Bank operates
through a network of 135 branch offices, 183 ATMs, numerous POS terminals, remittance
agents spread across the nation and over 170 international correspondent banking
relationships.Branch banking is at the core of the Bank’s operations that has enabled the
Bank to reachto a larger client bases and build one of the largest retail and corporate books
among domestic banks. The Bank’s Treasury is a key player in domestic banking. The Bank
operates its investment banking arm through its Subsidiary Nabil Investment Banking Ltd.
The Bank’s strong foundations, inexorable endeavors, effective strategies and prudent
management practices are the pillars of unprecedented success that it has enjoyed over the
years. As a provider of complete financial services, the Bank recognizes that its role goes
beyond just transactions. It is committed in its programs targeted towards increasingfinancial
literacy and financial access to the larger section of national population. Extending credit to
deprived sectors of the society through micro lending and financing priority sectors that
includes agriculture, renewable energy and tourism are key areas that define the Bank’s
commitment to the country’s development initiative. The Bank has established its branch
offices in multiple rural locations in the western and far western hills to reach out to the
financially under-privileged population and increase financial literacy. The Bank is also
actively aware of its social sustainability role and has maintained a policy to fund various
CSR activities by creating a fund equivalent to one percent of its net profit every year.
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1.1.3 A Brief Profile of Everest Bank Limited

Everest Bank Limited (EBL) started its operations in 1994 with a view and objective of
extending professionalized and efficient banking services to various segments of the society.
The bank is providing customer-friendly services through its Branch Network. All the
branches of the bank are connected through Anywhere Branch Banking System (ABBS),
which enables customers for operational transactions from any branches. With an aim to help
Nepalese citizens working abroad, the bank has entered into arrangements with banks and
finance companies in different countries, which enable quick remittance of funds by the
Nepalese citizens in countries like UAE, Kuwait, Bahrain, Qatar, Saudi Arabia, Malaysia,
Singapore and UK. Bank has set up its representative offices at New Delhi (India) to support
Nepalese citizen remitting money and advising banking related services. Everest Bank
Limited (EBL) provides customer- friendly services through its wide Network connected
through ABBS system, which enables customers for operational transactions from any
branches. The bank has 115 Branches, 143 ATM Counters, 31 Revenue Collection Counters
and 3 Extension Counters across the country making it a very efficient and accessible bank
for its customers, anytime, anywhere.
a) Joint Venture Partner
Punjab National Bank (PNB), joint venture partner (holding 20% equity) is one of the
largest nationalized bank in India having presence virtually in all important centers. Owing to
its performance during the year 2012-13, the Bank earned many laurels & accolades in
recognition to its service & overall performance. Recently, PNB was awarded with “IDRBT
Banking Technology Excellence Award” under Customer Management & Intelligence
Initiatives. The Bank also bagged “Golden Peacock Business Excellence Award 2013” by
Institute of Directors. Similarly, the Bank was recognized as ‘Best Public Sector Bank' by
CNBC TV 18. The bank has now more than7,000 branches and 8,500 ATMs spread all
across India. As a joint-venture partner, PNB has been providing top management support to
EBL under Technical Service Agreement.
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The capital composition of Everest bank Ltd. is as given below:

 Joint venture (Punjab National Bank) 20.00%
 General public 69.50%
 Other institutions 10.50%
b) Total 100.00%
c) (Source: www.everestbankltd.com)
1.1.4 A Brief Profile of Standard Chartered Bank Nepal Ltd.

Standard Chartered Bank Nepal Limited has been in operation in Nepal since 1987 whenit
was initially registered as a joint-venture operation. Today, the Bank is an integral partof
Standard Chartered Group having an ownership of 70.21 percent in the company with 29.79
percent shares owned by the Nepalese public. The Bank enjoys the status of the largest
international bank currently operating in Nepal.
Standard Chartered Bank is a leading international banking group with a 160-year

history in some of the world’s most dynamic markets. We bank the people and companies
driving investment, trade and the creation of wealth across Asia, Africa and the Middle East.
Our heritage and values are expressed in our brand promise, Here for good. Standard
Chartered PLC is listed on the London and Hong Kong Stock Exchanges as well as the
Bombay and National Stock Exchanges in India. With 14 points of representation, 28 ATMs
across the country and more than 504 local staff, Standard Chartered Bank NepalLimited is
serving its clients and customers through an extensive domestic network. In addition, the
global network of Standard Chartered Group enables the Bank to provide truly international
banking services in Nepal.
Standard Chartered Bank Nepal Limited offers a full range of banking products and
services to a wide range of clients and customers representing individuals, mid-market local
corporates, multinationals, large public-sector companies, government corporations, airlines,
hotels as well as the Development Organization segment comprising of embassies, aid
agencies, NGOs and INGOs. The Bank has been the pioneer in introducing ‘client focused’
products and services and aspires to continue its leadership in introducing new products. It is
the first Bank in Nepal to implement the Anti- Money Laundering policy and to apply the
‘Know Your Customer’ procedure on all the customer accounts.
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The Bank believes in delivering shareholder value in a socially, ethically and

environmentally responsible manner. Standard Chartered throughout its long history has
played an active role in supporting those communities in which its customers and staff live.
Launched in 2003, seeing is Believing (SIB) is the Bank’s global initiative to
tackleavoidable blindness and visual impairment. It is a collaboration between Standard
Chartered, the International Agency for the Prevention of Blindness (IAPB) and leading
international eye health organizations. The Bank is also actively engaged with the
communities in raising awareness around Financial Literacy, Environment, Health and
Education. Subsequent to the devastating earthquake of April and May 2015, the Bank
engaged with its disaster relief partner Habitat for Humanity in undertaking
rehabilitationand reconstruction project which came to a successful end in June 2018.
From 1 January 2019, the Bank’s Global Community Program Strategy focuses on
empowering the next generation to learn, earn and grow. There are three pillars to the
strategy: education, employability and entrepreneurship. Within each pillar, there are global
community program (GCPs): the existing program Goal (Education) and two newprogram:
Youth to Work (Employability) and Futures for Entrepreneurs (Entrepreneurship). The Bank
will continue to support all existing SIB commitments until 31 December 2020. From 2020,
the Bank will build on SIB’s legacy by supportingthe development of the Vision Catalyst
Fund (VCF). Further, the Board has proposed the dividend of 17.50 percent for which
equivalent amount will be appropriated in the currentyear after the required approvals.
1.2 Problem Statement

Bank should have ready access to immediately expendable funds at reasonable cost
precisely at the time those funds are needed. Lack of adequate liquidity is often one of the
first signs that a bank is in serious financial trouble (rose, 1999). Bank should have adequate
liquidity to minimize both asset side liquidity risk and liability side liquidity risk of a
commercial bank. Both the liquidity deficit and more liquidity surplus indicatethe problem in
the financial health of a commercial bank. More liquidity surplus hurts the profitability of
the commercial bank as it reduces the return on assets. Similarly,
11
liquid deficit also costs much to the commercial banks in term of the higher purchasing price
of liquidity and affects the reputation of the banks. Therefore, the commercial banks should
strike the trade-off between the profitability and liquidity risk.
The financial intermediation roles of commercial banks are to use the idle funds
borrowedfrom the lender by investing such funds in other classes of financial assets
investment. The business activity of the bank are not able to meet their financial obligation,
the publicbegins to lose confidence and these will cause of lot of competition to the financial
sector.With the high increase of competition in the banking industry, every commercial bank
tries to strive to operate on profit and at the same time meet the financial demand of its
depositors by maintaining adequate liquidity. The problem then becomes how to select the
optimum point of liquidity at which commercial bank can maintain its assets in orderto
operate on profit and also to meet the demand of depositors. These problems become more
difficult as a large number of banks are basically engaged with profit maximization and tends
to neglect the importance of liquidity management and these can lead to technical and legal
insolvency (Adebayo, et al. 2011).
There always arises an issue of maintaining high level of liquidity or low level of
liquidity. While maintaining high level of liquidity, the excess cash remains idle and
profitability of banks will be affected. In other case of low level of liquidity, the banks are
not able to pay their debt obligations. The problems to be addressed by this study evaluate the
relationship between liquidity and profitability of commercial banks and the research work
also tried to see the other problems such as the effect of excess liquidity and the problem of
estimating the proportion of the deposits that can be demand at any specific time and also
selection of factors that affects the liquidity level of banks and ultimately affects profitability
of banks. The profitability (ROA) of Saudi banks is surpassed the profitability of the
Jordanian banks. The profitability of Saudi banks has a positive and significant correlation
with total investment to total assets ratio, total equity to assets ratio and liquidity risk, in
addition, there has been a negative and significant correlationwith net credit facilities to total
assets ratio, net credit facilities to total deposits ratio, cost- to-income ratio and size variables.
Whereas, the profitability of the Jordanian banks hasa significant positive correlation with
liquidity risk, net credit facilities to total assets ratio, total equity to assets ratio and net credit
facilities to total deposits ratio variables (Almazari, et al. 2014).
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There is a significant impact of only liquidity ratio on ROA while insignificant on ROE
and ROI. The results also showed that ROE is not significantly affected by three ratios
current ratio, quick ratio and liquid ratio while ROI is greatly affected by current ratios,quick
ratios and liquid ratio. The main results of the study demonstrate that each ratio (variable)
has a significant effect on the financial positions of enterprises with differing amounts and
that along with the liquidity ratios in the first place. Profitability ratios alsoplay an important
role in the financial positions of enterprises (Rehman & Saleem, 2011).
Lack of strength and efficiency relating to the analysis of financial statement
affects the financial performance of the bank. Commercial bank's cash and bank balance an
cash reserve with NRB have a fluctuating and declining trend while various deposits have
been increasing, it reflects inefficiency in liquidity management of the bank. Based on the
above international and national findings, the following issues can be raised:
i) Does liquidity affect the banks' profitability?
ii) Do sample banks manage and utilize their assets effectively?
iii) Do sample banks succeed to provide sufficient return to their shareholders?
iv) What is the Liquidity position in Nepalese commercial Banks?
v) What is the profitability status in Nepalese commercial Banks?
1.3 Objectives of the Study
The major objective of the research study is to examine the impact of liquidity on
profitability of commercial banks in Nepal. The specific objectives of research are as
follows:
i. To examine the existing position of selected bank performance indicators,

bank specific factors and macroeconomic factors,
ii. To analyze the impact of liquidity on profitability of Nepalese commercial banks,
iii. To assess the impact of capital ratio on Return on Assets (ROA) and Return
onEquity (ROE),
13
iv. To assess the impact of investment ratio on Return on Assets (ROA) and
Returnon Equity (ROE),
v. To analyze the impact of liquidity ratio on Return on Assets (ROA) and Return
onEquity (ROE) &
1.4 Research Hypothesis
Hypothesis are formulated as possible answer for the research questions. The tentative
assumptions are:
1. H11: There is no significant relationship between capital ratio and bank profitability.
2. H12: There is no significant relationship between investment ratio and profitability.
3. H13: There is no significant relationship between liquidity ratio and profitability.
1.5 Rational of the Study
The main stakeholders in our research include the financial foundation, the president
and the board of directors. They have the unlimited liabilities for the accomplishment of this
mission. Many experts are very pessimistic about this problem. They strongly believe that
many of the banks will not meet their expectations and they will face several adversities with
the lack of liquidity. The board of directors must cooperate with the department of project
management in order to recommend solutions for the problem.
The project team is a significant stakeholder in this occasion. The effective project planning
should ensure the survival of the bank. We need to provide the essential tools and
methodologies to deal with the forthcoming crisis. The design of new products, the insurance
of good relationships among the customers and the bank and the project planning for the
creation of new investments will be the most significant issues for the project team.
The households and the businesses are a major stakeholder in the proposed thesis. In
the researcher point of view, the growth of inflation in the last two years and the inability of
the households to pay their debts are two severe characteristics for the rise of this
phenomenon. Many of the business and families face unbelievable difficulties with the high
price of many products. In the next years, many of the credit foundations should search to
find solutions to ensure their profitability.
14
The society in general, will benefit with the decrease of liquidity. The banks will have the
opportunity to give business and mortgage loans in better terms and with decreased rates.
Many households will have the chance to acquire their own house and many of the
entrepreneurs will manage to expand their companies.
1.6 Limitations of the Study

In a present scenario, there are 27 commercial banks operating in Nepalese financial
market. Out of them, only three joint venture commercial banks are taken as sample. Thelast
10 years' published data of sample banks have been incorporated in this study. Out of the so
many financial ratios, ROA and ROE are taken as dependent variables and capital ratio,
investment ratio and liquidity ratio are taken as independent variables. For the fulfilment of
research objectives, the only major financial statements like Balance Sheet and Income
Statement have been taken for the analysis. This study is only focused on liquidity and
profitability matters.
This study interacts with statistical tools such as mean, standard deviation, coefficient
of variation, correlation, regression, auto correlation and multi collinearity test. Hypothesis
containing regarding this study interacts only with p-value with 90% confidence lever for
significant.
Among many financial tools it only deals with ratio analysis such as under profitability
ratio, return on assets and return on equity as dependent variables as well as capital ratio,
liquidity ratio and investment ratio have been considered as independent variables.
15
CHAPTER II
LITERATURE RIVIEW
This section attempts to build strong theoretical background through the help of which
further search for solutions of the research problems would be easier. Resource mobilization:
its theoretical background, academic insights, nature, advantages, importance and other
various issues are addressed here in this chapters contributed by different experts and
others towards this field. While reviewing the literature different sources like books,
documents, bulletins, reports, journals and articles etc. are consulted. Generally, literature is
reviewed by two ways for any research purpose. Theyare:
 Conceptual Review
 Review of related studies
2.1 Conceptual Review
2.1.1 Concept of Liquidity
Liquidity is the status and part of the assets which can be used to meet the obligation.
Liquidity can be viewed in terms of liquidity stored in the balance sheet and in terms of
liquidity available through purchased funds. The degree of liquidity depends upon the
relationship between cash assets plus those assets which can be quickly turned into cashand
the liability awaiting payment. Generally, the definition of liquidity can't be found in the
same way, in the countries of whole world. Because, it is known, as much as the
development of the monetary sector take place or the use of monetary devices increases, so
much the definition of it goes wider (Bhandari et al. 2003).
Liquidity ratio measures the ability of the firm to meet its current obligations. In fact,
analysis of liquidity needs the preparation of cash budgets and cash and fund flow
statements; but liquidity ratios, by establishing a ratio between cash and other current
assets to current obligations, provide a quick measure of liquidity. A firm should ensurethat it
does not suffer from lack of liquidity, and also that it does not have excess liquidity.The
failure of a company to meet its obligations due to lack of sufficient liquidity will result in a
poor creditworthiness, loss of creditors' confidence, or even in legal tangles resulting in the
closure of the company. A very high degree of liquidity is also bad; idle assets earn nothing.
The firm's fund will be unnecessarily tied up in current assets. Therefore, it is necessary to
16
strike a
17
proper balance between high liquidity and lack of liquidity (Pandey et al.2000).
The liquidity position of bank is very important to maintain the public faith upon banks.
People deposit their precious assets and funds into bank with the faith that banks repay it with
guarantee as agreed terms and conditions. So, bank must refund the public depositon demand
or on expiry of predetermined time period. When a bank fails to repay deposited money on
demand, it lends to the loss of public faith upon banks. Then accountholders rush into bank to
withdraw their money deposited.
Lack of adequate liquidity is often one of the first signs that a bank is in serious financial
trouble. The troubled bank usually begins to lose deposits. This erodes its supply of cashand
forces the bank to dispose is more liquid assets. In this situation, other bank become more
increasingly reluctant to lend the troubled bank any funds without additional security or a
high rate of interest. This will further reduce the earnings of the problematicbank and
threatens it with failure.
Liquidity management is much more important than we may realize, because a bank
canbe closed if it cannot rise enough liquidity even through technically it may still be solvent.
Many banks assume that liquid funds can be borrowed virtually without limit any time they
are needed. Therefore, they see little need to store liquidity in the form of easily marketed,
stable-price assets. The enormous cash shortages experienced in recent years by banks in
trouble make clear that liquidity needs cannot be ignored.
Liquidity is an important principle of bank lending. According to the principle of liquidity,

banks should invest their funds in such sectors, where investment can be converted into cash
easily and quickly without remarkable loss on their value. Banks should invest majority of
their funds in government securities and firstclass securities,which possess sufficient
liquidity (Singh, et al. 2005).
There are certain securities such as central, state and local government bonds, which are
easily saleable without affecting their market prices. The shares and debentures of ordinary
firms are not easily marketable. So, the banks should make investments in government
securities and shares and debentures of reputed joint stock companies. This is the basic
principle of liquidity.
The liquidity position of a firm would be satisfactory if it is able to meet its current
obligations when they become due. A firm can be said to have the ability to meet its short-
18
term
19
liabilities if it has sufficiently liquid funds to pay the interest on its short- maturing debt
usually within a year as well as to repay the principal. This ability is reflected in the liquidity
ratios of a firm. The liquidity ratios are particularly useful in credit analysis by banks and
other suppliers of short-term loans.
2.1.2 Importance of Liquidity
A bank could not run without liquidity. The NRB from time to time changes the legal
provision about the liquidity. The commercial banks and financial institutions should
maintain the balance of cash fund in required quantity fixed by NRB. The importance of
liquidity is considered very sensitive because if it can't maintain the liquidity, it has to pay
fine. The commercial banks and financial institutions should keep the stock of liquidassets in
the ratio of their deposit liability, as fixed by the NRB.
The commercial banks and the financial institutions should keep a fund correctly which
the percent fixed from time to time for the liability of total deposit. The process of fixingthe
fund is as fixed by the central bank from time to time. If a commercial bank or a financial
institution does not keep the stock of liquid property as per the law and policy ofthe central
bank, then there is a provision to fine them. In this way, if a commercial bankand a financial
institution can't maintain liquidity, there is legal provision that the NRB can impose fine as a
punishment. So, there is no dispute that liquidity is the most important thing for a bank.
People deposit their savings into bank to safeguard them, earn interest, and get back
whenever they need. Therefore, banks must maintain liquidity to refund the deposit, when
account holders withdraw deposits. Hence, liquidity is the life-blood of bank without
which a bank cannot survive for long run. Banking transactions are more dependent upon the
mutual faith between bankers and customers. It is essential to maintain sufficient cash reserve
in bank maintain the public faith. The basic importanceof bank liquidity can be presented as
follows:
1. Liquidity is essential for the payment of all deposits such as current, saving,
fixed and call account of its customers.
2. Liquidity is important to maintain statutory liquidity ratio in banks.
3. Liquidity is important and inevitable factor to advance loan.
4. Liquidity is needed to pay dividend to their shareholders.
5. Liquidity is essential to face the economic rise and fall or economic crisis.
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6. Liquidity is essential to gain trust from the public including other sectors.
7. Liquidity is necessary for the efficient and healthy competition among banks.
8. Liquidity is important to meet the daily expenses that are spent in the
administrative functions.
2.1.3 Capital Ratio
It measures the financial strength of a bank and indicates the extent of financial stabilityat the
bank. Capital can be calculated by dividing capital by total assets. The equity-to- asset ratio
measures how much of bank’s assets are funded with owner’s funds and is a proxy for the
capital adequacy of a bank by estimating the ability to absorb losses. As the literature review
pointed out, there are mixed results regarding the relationship between the equity-to-asset
ratio and banks profitability. Following the risk-return tradeoff, a higher equity-to-asset ratio
leads to a lower expected return. Opposed to the risk- return hypothesis, Berger (1995)
examines the signaling hypothesis and bankruptcy cost hypothesis, suggesting that a higher
equity-to-asset ratio increase profitability due to signaling issues or lower costs of financial
distress.
2.1.4 Investment Ratio
Loan to deposit is the most important ratio to measure the liquidity condition of the
bank. Loan means the advances for the conventional banks. Bank with Low LDR is
considered to have excessive liquidity, potentially lower profits, and hence less risk as
compared tothe bank with high LDR. However, high LDR indicates that a bank has taken
more financial stress by making excessive loans and also shows risk that to meet depositors’
claims bank may have to sell some loans at loss (Ahmed, 2009). The investment ratio
indicates to the appropriateness of investing the available funds to the bank which derived
from deposits, to meet the demands of credited loans and advances. Investment ratio can be
calculated by dividing the credit facilities by total deposit.
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2.2 Review of Previous Studies

2.2.1 Review of Articles and Journals
Various studies have been conducted in the impact of liquidity on profitability of commercial
banks on different aspects. The conclusion of the previous studies on the different aspects is
relevant to this study. Thus, the studies of previous research are reviewin this regard.
Alshatti (2014) concluded that there is an effect of the liquidity management on profitability
in the Jordanian commercial banks as measured by ROE or ROA, where the effect of the
investment ratio and quick ratios on the profitability is positive when measured by ROE, and
the effect of capital ratio on profitability is positive as measuredby ROA, and the effect of the
other independent variables on the two measures of profitability (ROE and ROA) is negative,
the researcher thinks that this negative effect is due to the increased volume of untapped
deposits at the Jordanian commercial banks.
Charmler, at all (2018) found that bank liquidity is very important as its affect their
profitability. They revealed that there is positive association between bank liquidity and
profitability consistent with the study hypothesis. These result however should be interpreted
with caution as previous studies have suggested that there is a limit to which bank liquidity
improves profitability. This means that even though bank liquidity improves profitability, at
some stage increase in liquidity could becounterproductive and will reduce the profitability of
banks. Their study implies that banks must take critical look at their liquidity if they want to
improve their performance in terms of profitability. Their results revealed that variables such
as net interest margin, capital adequacy ratio, the size of the banks and foreign ownership
have positive relationship with bank profitability. Their results have several implications to
banks andtheir managers as well as regulators of the sector.
Pradhan and Shrestha (2016) revealed that return on equity is positively related to
investment ratio. This indicates that higher the investment ratio higher would be the return on
assets and return on equity. Similarly, correlation between capital ratio and ROA and ROE is
found to be positive indicating higher the capital ratio, higher would be ROA and ROE.
However, the correlation between return on equity and liquidity ratio is found to be negative
indicating higher the liquidity in the bank, lower would be the return on equity. Further, the
correlation is found to be negative for quick ratio with return on equity.
Liquidity of banks was one of the major determinants of Kenyan banks profitability. Thisis
the case because adequate liquidity helps the bank minimize liquidity risk and financialcrises.
The bank can absorb any possible unforeseen financial position. The effect on
22
profitability is
23
higher when the liquid assets are not held exclusively, because exclusiveliquid assets have no
or little interest generating capacity. Also the opportunity cost of holding low return assets
would eventually outweigh the benefit of any increase in the banks liquidity resiliency as
perceived by funding markets (Mashhad, et al. 2012).
Shrestha (2018) found that liquidity management and profitability in commercial banks are
two sensitive issues in the operations of commercial banks and of which informationon them
are seriously hoarded. The major concern of his study was to reconcile the conflicting
requirements of bank liquidity and bank profitability arising from the conflicting desires of
the two major providers of the bank resources namely the shareholders and the depositors.
The shareholders desire maximum profitability as a return on their capital, while the
depositors opt for a maximum liquidity as a guarantee for safety and ability to pay their
money on demand. From the study, researcher conclude that both illiquidity and excess
liquidity are "financial diseases" that can easily erode theprofit base of a bank as they affect
bank's attempt to attain high profitability-level. The pursuit of high profit without
consideration to the liquidity level can cause great illiquidity, which reduces the customers'
patronage and loyalty. Therefore, any bank that has the aim of maximizing its profit level
must adopt effective liquidity management. Effective liquidity management also requires
adequate liquidity level which will help commercial banks to estimate the proportion of
depositor's funds that will be demanded at any period and arrange on how to meet the
demand.
Shahchera (2012) analyzed the profitability of listed banks using unbalanced panel data for
the period 2002-2009, and used the liquidity asset and liquidity asset- square for estimating
liquid asset and profitability relationship. The estimated relationship betweenliquid assets and
bank profitability is as predictable. Coefficients for the liquid assets ratio, its square, business
cycle, regulation and its product of interaction business cycle and regulation are all
statistically significant. The study found evidence of a non‐ linear relationship between
profitability and liquid asset holdings. A substantial result of this study is that the business
cycle significantly influences bank profits. The coefficient of regulation is negative and
significant. Therefore, if regulators minimize the constraints imposed on banks, banks obtain
profit.
Khan and Ali (2018) empirically proved through analysis that liquidity has positive
relationship with profitability, and has considerable impact on the profitability of commercial
banks in Pakistan. With the growing liquidity level to ascertain limit, the profitability also
24
increases. None of the variable shows negative relationship. Every ratio of liquidity shows
positive relation with all the ratios of liquidity. Hence, this research indicates that liquidity
has positive relationship with profitability. Therefore, it is suggested that banks should keep
considerable amount of their liquid assets in order to get higher rate of profit.
Muiruri (2017) concludes that there is positive relationship between liquidity and
profitability in Kenya’s commercial banks. Bank should not only focus on profitability but
also ensure that there is effective and efficient management. This will enhance the growth of
Kenyan commercial banks. Banks should also not have excessive liquidity but also have
other ways of maintaining liquidity such as overnight borrowing or discountingbills. The
excessive liquidity should be invested in short term instrument to increase return on
investment.
Bwacha and Xi (2017) conducted a research work to examine the relationship between
liquidity and profitability was measured using the LDR, DAR and CDR while profitability
ROE and ROA. LDR was found not to have any significant impact on profitability measured
either as ROE or ROA. This is due to the increase in the interest rates at which banks would
borrow both from depositors as well as meeting their liquidityneeds that offset their marginal
interest income from investments in assets like loans. DAR was found to have significant
impact on profitability as measured in terms of ROE but none in the light of ROA. This is
because banks were able to reap superior interest income from investments in assets
comparative to the interest payable to depositors. However, when this superior interest
income is compared to the huge volume of assets held by banks it is almost insignificant and
that is the possible reason why DAR does notsignificantly affect ROA. Like LDR, CDR was
found not to have significant impact on profitability for both its proxies ROE or ROA. This is
for the reason that the increase in liquid assets in the aftermath of the crisis meant an
increase in the opportunity cost of holding liquid assets and also the high interest rates on
deposits counteracted the interestincome on liquid assets.
Gopali (2019) conducted a research work to measure the liquidity and profitability of
commercial banks. The researcher found that the NABIL bank solvency position is greater
than Sanima bank. The study results revealed that liquidity position of both bankswere sound
in case of mobilized the funds of shareholders efficiently into profit generating projects also,
Sanima bank doesn’t mobilized and NABIL has been successfully in providing more rate of
return to its shareholders by the proper use of theiravailable fund than others. In term of loan
and advances against deposits, Sanima bank has used more percentage of its total deposits
into loan and advance than NABIL bank. NABIL has mobilized highest percentage of its
25
total deposits into total investment. From profitability ratio NABIL bank has highest
return of
26
assets as compare to Sanima bank. Return on equity ratio of NABIL bank is also higher
compare to sanima bank. This conclude that the profit earning capacity of NABIL bank is
greater as compare to Sanima bank.
Sthapit and Maharjan (2012) found that the overall trend of liquidity ratios are in not
smoothing in both NABIL and Standard Chartered Bank Nepal (SCBN). But variation in
liquidity ratios as well as profitability in SCBN is lower than NABIL. Fluctuating trendof the
liquidity ratios make difficult in increase trend of profitability of the banks. So, according to
liquidity and profitability, SCBN seems to be more efficient than NABIL. There is a
significant effect of LFTDR, NRBTDR and CHTDR on profitability in SCBN only. This
indicates that increase in these liquidity ratios boost the bank profitability and vice-versa. But
there are no significant effects of the liquidity ratios on profitability in NABIL. This reveals
that profitability has no relationship with those liquidity ratios. The highly fluctuation of
liquidity ratios may cause the insignificance of the hypotheses. The overall average ROA of
NABIL and SCBN are similar but coefficient of variation (C.V.) of SCBN is lower than that
of NABIL. This means that profitability position is more consistent in SCBN. So, SCBN is
better in profitability position in terms of low variation. Therefore, the liquidity performance
of SCBN is better than NABIL.
Khalid, Rashed and Hossain (2019) investigated on the impact of liquidity on Bank’s
financial performance, and has been tried to get the relationship between liquidity and
financial performance of banks in the Bangladesh perspective. In order to conduct the
experiment Dhaka Stock Exchange enlisted banks were selected. In a nutshell, from the
research it can say that liquidity has no significant impact on return on asset (ROA) and as
well as return on equity (ROE) as financial performance. Researcher’s related with research
also believe that further research is required to justify the empirical findings ofthis research.
Mohanty and Mehrotra (2018) concluded that liquidity has a significant negative influence
on the profitability as measured by ROA because of banks having excessive liquidity instead
of investing the money to generate profit. However, there is no statistically significant
relationship between ROE and liquidity measures taking all the variables into consideration,
irrespective of the type or form of commercial banks in India. This leads to the conclusion
that the commercial banks can focus on increasing their profitability without affecting their
liquidity and vice versa. However, this is not guaranteed because the situation might change,
especially changes in the macroeconomic environment that are outside the control of the
commercial banks.
27
2.2.2 Review of Thesis
Gautam (2012) conducted case study on "A Study on Financial Performance of

Nepal Bank Limited”, Master’s Thesis of Shanker Dev Campus, Faculty of Management,
Tribhuvan University. The major findings and objectives are as follows:
Objectives of the study were:
 To evaluate the bank’s efficiency to face the challenges and measure the
comparative financial strengths and weakness.
 To analyze the bank’s performance under priority sectors of government
 To analyze income and expenditure and to provide suggestions and

recommendations to the bank. These are the primary objectives of the
study
Major findings of the study were:
 The bank is seemed to be unable to utilize its highcost resources in high

yielding investment portfolio.
 The only positive aspect is, if risk can be managed, percentage of loans and
advances on total deposits has increased.
 Long –term debts, total debts and total deposit ratios have gradually decreased.
It indicates that bank has not followed any policy regarding these items.
 The bank has experienced negative EPS and P/E ratios which have also heavily
fluctuated during the study periods. Thus, it can be said that the financial
position of the NBL is worse due to its failure to utilize its resources efficiently
and due toits inefficiency in risk management.
Shrestha (2014) conducted on "Liquidity and Credit Management Practices of Commercial

Banks in Nepal". Researcher has taken two sample of banks Viz; Nepal Investment bank Ltd.
and Nepal Credit and Commerce bank Ltd. and had made following objectives and major
findings.
Objectives of the Study were:
 To analyze the trend of liquid assets maintained by the commercial banks.

 To evaluate the cash reserve ratio maintained by the NIBL and NCC.
 To analyze the credits and advances provided by the NIBL and NCC.
 To find out the strengths and weaknesses in the credit position of NIC and
28
NCC.
Major Findings of the Study were:
 The analysis of the trend of liquid assets maintained by banks shows NIBL in
a better position than NCC.
 The analysis of the credit management of the commercial banks shows the
overall strength of the department in maintaining a healthy relationship between
various variables in the credit sector. This includes the relationship of the total
loans and advances with total deposits, net profit, total liquid assets and total
nonperforming loans. These relationships are measured by their correlation
coefficients.
 The relationship between total credit and total deposit shows highly significant
positive correlation. This indicates that the total deposit has increased with the
increase in the total credit provided by the commercial banks, thus,
strengthening their credit and liquidity positions.
 The relationship between total credit and net profit also shows a significant
positive correlation. This indicates that the total credit provided has been
contributing in increasing the net profit of the company. This, in turn, suggests
the effective management of credit in earning high interest income and reducing
the chances of credit defaults.
 The relationship between the total credit and total liquid assets also shows a
highly significant positive correlation among them. This indicates that the banks
have been effective in balancing the liquidity of the banks with their need to
provide loans and advances.
Nepal (2015) has conducted a case study on the topic of “Credit Management of
Commercial Banks in Nepal" The major findings and objectives are as follows:
 To assess the credit practices of selected Nepalese commercial banks.
 To explore the credit efficiency, analyze the industry environment and

management quality in terms of credit practices.
 To explore the relationship with loan and advances, NPA and Net profit.
29

 Repayment is satisfactory in agro based industry and production sector
compared to other sectors.
 Management quality and credit efficiency of selected banks found satisfactory

as they have standard credit practices.
 Credit disbursement and repayment has significant relationship. Flow of new

credit depends upon the recovery status.
Maharjan (2015) conducted on ‘Financial Performance analysis of Commercial of

Nepal’ The major findings and objectives are as follows:

 To analyze the trend of liquid management by the commercial banks.
 To evaluate the cash reserve ratio maintained by the NABIL and HBL.
 To analyze the total loan and advances, total investment provided by t h e
N A B I L and HBL.
 The liquidity position of NABIL is very strong while HBL have strong
capacity to meet the short term obligations.
 HBL have invested significant portion of deposit to total investment than

other.
 Total deposit, investments and loans and advances of all banks are inincreasing
trend.
 The trend line of loan and advances for both banks is upward slopping which
refers to the increase in the disbursement of loan and advances.
 NABIL is successful in optimizing the assets mobilization due to its highest

ROA than HBL.
 Liquidity management practice is still in developing phase in Nepal.
Khadka (2016) conducted as case study on “A Study on Lending Performance (with

reference to NABIL, and SCBNL Bank).” The major findings and objectives are as
30
follows:

 To evaluate the portion of nonperforming loan and the level of NPAs in total
deposit and total lending of selected commercial banks.
 To analyze the impact of nonperforming assets in the profit of commercial

banks.
 To study the loans amount provided by the commercial banks.

 The ratio NPL to loan and advances of both banks is defining but the rate of
declining in the same ratio in NABIL and SCBNL. Likewise, the management
of NABIL has been able to reduce NPL sharply than SCBNL even though the
average loan and advances of NABIL bank is higher than SCBNL.
 This NPL to total deposit ratio is also gradually decreasing. This ratio of
SCBNL is lower than the NABIL. Average deposit collection of SCBNL is
higher than the NABIL.
 The major profit of commercial banks is earned from the interest by

disbursingloan and advances. It means that net profit indicates the performance of
loan. theratio of net profit to total loan and advances of SCBNL is higher than NABIL.
2.3 Research Gap
In international context, some of the researchers have found there is negative relation
between liquidity and profitability of manufacturing companies, commercial banks. That
means as liquidity increases, profitability decreases and vice versa. Whereas some of the
researcher also revealed that there is a positive relationship between the liquidity and
profitability. Some researchers also revealed that the impact of liquidity on financial
performance is non-linear and the other also stated there is no significant impact of liquidity
on profitability. On the contrary, in Nepalese context, most of the researchers have revealed
that the liquidity is positively associated with commercial banks profitability. Due to change
in time, market factors, banking services and other significant factors, there arises drastic
31
change in the banking field. Since, few studies are conducted in Nepal and there are some
areas that need to be researched numerously. So, this research fulfills the lack of previous
studies with analysis of current data which usesmore scientific tools and techniques.
32
CHAPTER III
RESEARCH METHODOLOGY
The entire process based on philosophies, principles and mechanism of research, by

which we attempt to solve problems or search the answer to question are collectively known
as the Research Methodology. It is the way of systematically solving the researchproblem. It
is the process of arriving at the solution of the problem through planned andsystematic
dealing with the collection, analysis and interpretation of facts and figures. It includes
different dependent and independent variables, types of research design, population and
sample, sources of data, data collection and processing procedure, data analysis tools and
techniques (statistical & financial tools, software package to be used in the research).
3.1 Research Design

This study has employed descriptive research design and casual comparative
research design to deal with issues associated with impact of liquidity on profitability of the
commercial banks in the context of Nepal. The descriptive research has been adopted forfacts
finding and searching adequate information about impact of liquidity on profitability. It
describes the real and actual condition, situation and facts. Besides, an effort has also been
made to describe the nature of four commercial banks consisting offorty observations during
fiscal year 2010/11 to 2019/20 by using descriptive statistics with respect to ROA, ROE, CR,
LR and IR.
Moreover, this study has employed casual comparative research design in order to
observe the direction, magnitude and relationship between profitability (ROA and ROE) and
liquidity variables (CR, LR and IR). It also seeks to find cause and effect relationshipbetween
independent and dependent variables after an action or event has already been occurred. It
determines the impact of liquidity on profitability.
3.2 Population and Sample
There are 27 listed commercial banks operating in Nepal. All 27 licensed Nepalese
commercial banks have been considered as the total population of this study. Out of
them, only three joint venture commercial banks namely NABIL bank limited, Everest bank
Limited and Standard Chartered Bank Nepal Limited are taken as a sample on the basis of
random sampling method. The sample banks are first three privately owned commercial
banks in Nepal. Based on the above data, the sample covers 11.54 percent of the population.
33
Theoretically, the sample should cover minimum 10 percent of its population.
3.3 Sampling Design
There are altogether 27 commercial banks in Nepal which are assumed to be the
population of the study but it is not possible to study all of these commercial banks within
this study. So, taking the total number of banks as population of the study, only three
insurance companies, namely Nepal Arab bank Limited, Everest Bank Limited and Standard
Chartered bank nepal Limited has been taken as sample on the basis of random sampling
method.
3.4 Nature and Sources of Data
This research is mainly based on secondary data of sample banks, annual reports of
Nepal Rastra Bank, published thesis, online journals and different libraries In addition
information has been collected from Research Department (Nepal commerce campus),
Library of Nepal Commerce Campus, etc.
The major sources of data and information are as follows:
i. Annual reports of sample banks

ii. Website of sample banks
iii.Banking and financial statistics
iv. Economy survey
v. Fifteenth five year plan of Nepal
vi. Monetary policy
vii. Ministry of finance
viii. Budget
ix. Other relevant authorities.
3.5 Instrument of Data Collection
In this research, quantitative data have been used rather than qualitative data. These
data have been collected from secondary sources mainly from the website of sample banks.
The other secondary sources are governmental sources, semi-governmental sources, private
organization, Nongovernment organization, International non-government organization,
newspapers etc. After collection of data it has been transferred intoinformation after a series
of steps. Such steps include: Editing, Coding, Classification, Tabulation, and Presentation.
34
3.6 Methods of Analysis
3.6.1 Statistical Tools

Descriptive Statistical
Tools
Descriptive statistical tools help to find out the trend of financial position of the sample
banks. It also analyzes the relationship between variables and helps banks to take
appropriate decisions regarding the fulfillment of organization goals. Descriptive analytical
tools such as Percentage, Mean (arithmetic), variance and standard deviation have been used
in this research.
a) Average/ Mean
Arithmetic mean of a given set of observations is their sum divided by the number of
observations. In general, if X1, X2.............Xn are the given N observations, then their arithmetic
mean, denoted by X is given by,

𝑋1 + 𝑋2 + ⋯ … … ∑𝑥
𝑋̅ = 𝑁 = 𝑁
Where,
X = Sum of the observations, and N = Number of Years
b) Standard Deviation
Standard deviation is the square root of the sum of the squares of the deviations
measured from the mean. Thus, in the calculation of standard deviation, first the arithmetic
average is calculated and the deviation of various items from the arithmetic average are
squared. The squared deviations are totaled and the sum is divided by the number of items.
The square root of the resulting figure is the standard deviation of the series (Elhance &
Agarwal, 2000). The standard deviation is conventionally represented by the Greek
lettersigma. If X1, X2… Xn is a set of N observations then, standard deviation is given by,
σ
(X X)  Sum of the squares of the deviations measured from mean

2
N = Number of Observations
Inferential Statistical tools
Unlike with the data description which have the focus of describing the sample data,
35
while the focus of inferential analysis is on estimation or hypothesis testing, by using sample
purely
36
to make inferences about the population. This process is formally known as inferential
statistics (Shah, 2013).
There are two major groups of inferential statistics, (i) parametric and (ii) non- parametric.In
this research, parametric test such as Correlation Analysis and Regressionanalysis has been
used.
a) Coefficient of Variation (C.V.)
Coefficient of variation is computed for comparing the variability of two distributions. A

distribution with smaller C.V. is said to be more homogeneous or uniform or less variable
than-the other, and the series with greater C.V. is said to be more heterogeneous or more
variable than the other. It is computed as under.
C.V.=
𝜎 𝑋100%
𝑋
b) Coefficient of correlation (r)
The correlation is a statistical tool which studies the relationship between two variables
and correlation analysis involves methods and techniques used for studying and measuring
the extent of the relationship between the two variables (Shah, 2013).Correlation analysis
enables to have an idea about the degree and direction of the relationship between the two
variables under study. However, it fails to reflect upon the cause and effect relationship
between the variables. The coefficient of correlation, denoted by r is computed as under:
N  XY   X .Y
r
37
c) Regression Analysis
The literal or dictionary meaning of the regression is moving backward or going back
or the return to the average value. Regression analysis is the technique of studying how the
variations on one series are related to variation in another series. It determines the nature and
strength of relationship between two variables. Thus, regression is the estimation of unknown
values or prediction of one variable from known values of other variables. The regression
analysis confined to the study of only two variables at a time is called simple regression.The
known value which is used for prediction (or estimation), is called independent (or regressed
or predictor or explanatory) variable and the unknown value which is to be estimated or
predicted by known value is called dependent (or regressed or explained) variable (Sharma &
Chaudhary, 2008). A line fitted to a set of data points to estimate the relationship between
two variables is called regression line. A line fitted by the method of least square is the line
of best fit. A line of regression gives the best estimate of one unknown variable for any given
value of the other variable.
The Model,
Model 1: ROA it=α0 + α1IRit+ α2LRit + α3CR it + ε it Model 2: ROE it= α0 + α1IRit+
α2LRit + α3CR it + ε it Where,
Dependent variables are:
ROA it=return on assets for the firm during the period t,
ROE it= return on equity for the firm during the period t, & Independent variables
are: IR it= investment ratio for the firm during the period t,
LR it= liquid ratio for the firm during the period t,
CR it= capital ratio for the firm during the period t, ε it= Error term
38
3.6.2 Financial Tools
Under financial tools, ratio analysis is used to determine the information. The majorratios
to be used in the research are:
(i) Return on Assets (ROA)

Return on assets is a financial ratio that shows the percentage of profit that a companyearns
in relation to its overall resources (Total Assets). It is calculated by:
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑅𝑂𝐴 =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
(ii) Return on Equity (ROE)
The return on equity is the amount of net income returned as a percentage of shareholders
equity. Return on equity measures a corporation’s profitability by revealing how much profit
a company generates with the money shareholders have invested.
𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
𝑅𝑂𝐸 =
𝑆ℎ𝑎𝑟𝑒ℎ𝑜𝑙𝑑𝑒𝑟′𝑠 𝐸𝑞𝑢𝑖𝑡𝑦
(iii) Capital Ratio

It measures the financial strengths of a bank and indicates the extent of financial
stability at the bank.
𝑇𝑜𝑡𝑎𝑙 𝐶𝑎𝑝𝑖𝑡𝑎𝑙
𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝑟𝑎𝑡𝑖𝑜 =
𝑇𝑜𝑡𝑎𝑙 𝐴𝑠𝑠𝑒𝑡𝑠
(iv) Investment Ratio

Investment ratio is the most important ratio to measure the liquidity condition of thebank.
It measures the credit provided to the customer as compared to deposit.
𝑇𝑜𝑡𝑎𝑙 𝐿𝑜𝑎𝑛
𝐼𝑛𝑣𝑒𝑠𝑡𝑚𝑒𝑛𝑡 𝑟𝑎𝑡𝑖𝑜 =
𝑇𝑜𝑡𝑎𝑙 𝐷𝑒𝑝𝑜𝑠𝑖𝑡
39
(v) Liquidity Ratio

This ratio measures the ratio of liquid assets by total assets. Liquid assets includes cash &
equivalent and cash reserve at the central bank, short-term deposits in banks and other
government and nongovernment guaranteed securities as a percentage of total bank assets.
𝐿𝑖𝑞𝑢𝑖𝑑𝑖𝑡𝑦 𝑅𝑎𝑡𝑖𝑜 = Liquid Assets
Total Assets
Where, Liquid Assets = Cash and cash equivalent+ Cash with NRB+ Money withBFIs+
Money at call and short notice+ Investment in government securities.
3.7 Research Framework
3.7.1 Independent variables

The variables that doesn't changed by the effect of other variables are called independent
variables. Investment Ratio(IR), Capital Ratio(CR) and Liquidity Ratio(LR) are said to be
independent variables in this study.
3.7.2 Dependent Variables

The dependent variables are those variables which represent the output or outcome whose
variation is to be studied. The outcome of dependent variables is changed due to change in
independent variables, here dependent variables are Return on Assets (ROA) & Return on
Equity (ROE).
3.8 Research Tools
For the fulfillment of the objective of research, various financial and statistical tools and
techniques, Excel (Software), SPSS have been used in this research. The analysis of datahas
been done according to the pattern of data available. Due to limited time and resources,
simple analytical statistical tools (Mean, Standard deviation, Covariance, Correlation and
regression analysis) have been used in this research. Likewise, financial tools such as ratio
analysis have also been used for financial analysis.
40
CHAPTER IV
RESULTS &
DISSCUSIONS
4.1 Introduction
This part of analysis has been divided into four sections. The first section incorporates the
results obtained from the financial tools. The descriptive and inferential statistics have been
presented and analyzed in the second section. In the third section, major findings revealed
from first and second sections have been drawn and in the fourth section, discussions of
different issues have been presented.
4.2 Financial Tools
To examine the financial performance of sample banks, different ratio has been computed,
tabulated, and analyzed.
Return on Equity
Return on equity measures a corporation’s profitability by revealing how much profit a

company generates with the money shareholders have invested.
Table: 1
Return on Equity (ROE)
F/Y NABIL (%) SCBNL (%) EBL (%)
2011/12 29.02 30.43 29.91
2012/13 30.25 28.36 27.14
2013/14 32.78 26.38 31.52
2014/15 27.97 26.27 29.02
2015/16 22.73 21.69 23.25
2016/17 25.61 17.18 20.61
2017/18 22.41 14.31 17.20
2018/19 20.94 18.66 15.81
2019/20 17.76 19.49 32.33
2020/21 13.61 15.15 28.49
Average 24.31 21.79 25.53
S.D. 5.95 5.73 5.95
C.V. 24.48 26.29 23.31
Source: Appendix I
41
Based on table 1, the average ROE of NABIL, SCBNL, and EBL is 24.31, 21.79 and 25.53
percent respectively. Similarly, standard deviation of NABIL, SCBNL and EBL is 5.95, 5.73
and 5.95 percent respectively. The CV of NABIL, SCBNL and EBL is 24.48,26.29 and 23.31
percent respectively. Results presented in table 1 reveal that SCBNL bank has higher ROE
with lower standard deviation but if observation is done on the basis of C.V. EBL has higher
ROE with lower C.V. Thus, both banks are superior than NABIL bank due to lower C.V. and
standard deviation respectively.
Figure no.1
Return on Equity (ROE)
Return On equity
35
30
25
20
15
10
NABIL (%)SCBNL (%)EBL (%)
In above figure, the average ROE of NABIL, SCBNL, and EBL is 24.31, 21.79 and 25,53
percent respectively. Similarly, standard deviation of NABIL, SCBNL and EBL is 5.95, 5.73
and 5.95 percent respectively. The CV of NABIL, SCBNL and EBL is 24.48,26.29 and 23.31
percent respectively. Results presented in table 1 reveal that SCBNL bank has higher ROE
with lower standard deviation but if observation is done on the basis of C.V. EBL has higher
ROE with lower C.V. Thus, both banks are superior than NABIL bank due to lower C.V. and
standard deviation respectively.
42
Return on Assets
Return on assets is a financial ratio that shows the percentage of profit that a companyearns
in relation to its overall resources (Total Assets). It is calculated by:
Table: 2
Return on Assets (ROA)
Years NABIL (%) SCBNL (%) EBL (%)

2011/12 2.43 2.55 1.98
2012/13 2.8 2.80 2.11
2013/14 3.25 2.67 2.39
2014/15 2.89 2.51 2.25
2015/16 2.06 1.99 1.85
2016/17 2.32 1.98 1.61
2017/18 2.69 1.84 1.72
2018/19 2.61 2.61 1.97
2019/20 2.11 2.61 1.94
2020/21 1.58 1.71 1.42
Avg. 2.474 2.327 1.924
S.D. 0.480 0.399 0.291
C.V. 19.40 17.15 15.12
Source: Appendix II
Based on table 2, the average ROA of NABIL, SCBNL and EBL is 2.474, 2.327 percent
respectively. Similarly Standard deviation of NABIL, SCBNL and EBL is 0.480, 0.399 and
0.291 percent respectively. The CV of NABIL, SCBNL and EBL is 19.40, 17.15 and 15.12
percent respectively. Results presented in table 2 reveal that EBL has higher ROA with lower
standard deviation and coefficient of variation respectively.
43
Figure No.2
Return on Assets (ROA)
Chart Title
25
20
15
10
Based on figure No. 2, the average ROA of NABIL, SCBNL and EBL is 2.474, 2.327
percent respectively. Similarly Standard deviation of NABIL, SCBNL and EBL is
0.480,0.399 and 0.291 percent respectively. The CV of NABIL, SCBNL and EBL is
19.40,17.15 and 15.12 percent respectively. Results presented in table 2 reveal that EBL has
higher ROA with lower standard deviation and coefficient of variation respectively.
44
Capital Ratio
It measures the financial strength of a bank and indicates the extents of financial stabilityat
the bank.
Table: 3
Capital Ratio

4.68 7.52 5.91
2011/12
5.16 8.38 6.68
2012/13
5.56 8.39 6.44
2013/14
5.93 9.89 6.63
2014/15
6.10 10.12 6.97
2015/16
6.11 9.54 6.86
2016/17
6.38 9.16 6.90
2017/18
8.89 11.54 7.25
2018/19
9.02 15.33 9.19
2019/20
10.32 16.57 10.36
2020/21
9.23 10.73 7.391
Avg.
1.7974 2.8655 1.3
S.D.
26.3738 26.921 17.763
C.V.
Source: Appendix III
Based on table 3, the average capital ratio of NABIL, SCBNL and EBL is 9.23, 10.73 and
7.391 percent respectively. Similarly standard deviation of NABIL, SCBNL and EBL is
1.7974, 2.8655 and 1.3 percent respectively. The CV of NABIL, SCBNL and EBL is
26.3738, 26.921 and 17.763 percent respectively. Finally, by considering all the results in
table 3, EBL bank is superior to other banks.
45
Figure No. 3
Capital Ratio
Capital Ratio
30
25
20
15
10
Based on figure No. 3, the average capital ratio of NABIL, SCBNL and EBL is 9.23,10.73
and 7.391 percent respectively. Similarly standard deviation of NABIL, SCBNL and EBL is
26.3738, 26.921 and 17.763 percent respectively. Finally, by considering all the results in
table 3, EBL bank is superior to other banks.
46
Investment Ratio
Investment ratio is the most important ratio to measure the liquidity condition of the bank. It
measure the credit provided to the customer as compare to deposit.
Table: 4
Investment Ratio

74.97 38.70 73.58
2011/12
71.17 45.35 77.43
2012/13
80.30 48.49 80.57
2013/14
77.92 54.43 75.36
2014/15
74.91 57.84 77.36
2015/16
74.67 56.11 71.82
2016/17
64.42 48.32 75.37
2017/18
70.91 56.17 79.12
2018/19
76.47 67.08 85.10
2019/20
82.35 69.63 88.31
2020/21
74.81 54.21 78.402
Avg.
4.8568 9.0031 4.8507
S.D.
6.4923 16.61 6.1871
C.V.
Source: Appendix IV
Based on table 4, the average investment ratio of NABIL, SCBNL and EBL is 74.81,54.21
and 78.402 percent respectively. Similarly standard deviation of NABIL, SCBNL and EBL is
6.4923, 16.61 and 6.1871 percent respectively. The results shown in the table 4 reveal that
EBL has maintained stable investment ratio as compared to other sample banks.
47
Figure No. 4
Investment Ratio
Investment Ratio
100
90
80
70
60
50
40
30
20
10
0
2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 Avg.S.D.C.V.
Based on figure No. 4, the average investment ratio of NABIL, SCBNL and EBL is 74.81,
54.21 and 78.402 percent respectively. Similarly standard deviation of NABIL, SCBNL and
EBL is 4.8568, 9.0031 and 4.8507 percent respectively. The CV of NABIL,SCBNL and EBL
is 6.4923, 16.61 and 6.1871 percent respectively. The results shown in the table 4 reveal that
EBL has maintained stable investment ratio as compared to othersample banks.
Liquidity Ratio
This ratio measures the ratio of liquid assets by total assets. Liquid assets includes Cash &
Cash equivalent, Cash reserve at central bank, Placement with BFIs and Investment inT- bills.
48
Table: 5
Liquidity Ratio

11.61 30.03 17.37
2011/12
13.99 24.39 16.69
2012/13
15.35 28.04 15.98
2013/14
13.88 32.59 23.06
2014/15
14.32 23.46 17.49
2015/16
18.05 20.95 37.52
2016/17
20.69 26.17 30.32
2017/18
14.07 16.87 28.74
2018/19
10.98 33.37 26.64
2019/20
17.79 31.19 23.05
2020/21
15.073 26.076 23.686
Avg.
2.8423 5.0797 6.76
S.D.
18.86 19.02 28.5428
C.V.
Source: Appendix V
Based on table 5, the average liquidity ratio of NABIL, SCBNL and EBL is 15.073, 26.076
and 23.686 percent respectively. Similarly, standard deviation of NABIL, SCBNL and EBL
is 2.8423, 5.0797 and 6.76 percent respectively. The CV of NABIL, SCBNL and EBL is
18.86, 19.02 and 28.5428 percent respectively. The results presented in the table 5 reveal that
the liquidity ratio of SCBNL is higher with lower value of standard deviation. Thus, SCBNL
is superior in term of ability to pay the short term obligations than other sample banks.
49
Figure No. 5
Liquidity Ratio
Liquidity Ratio
40
35
30
25
20
15
10
5
0
2011/12 2012/13 2013/14 2014/15 2015/16 2016/17 2017/18 2018/19 2019/20 2020/21 Avg.S.D.C.V.
Based on figure No. 5, the average liquidity ratio of NABIL, SCBNL and EBL is
15.073,26.076 and 23.686 percent respectively. Similarly, standard deviation of NABIL,
SCBNL and EBL is 2.8423, 5.0797 and 6.76 percent respectively. The CV of NABIL,
SCBNL and EBL is 18.86, 19.02 and 28.5428 percent respectively. The results presented in
the table 5 reveal that the liquidity ratio of SCBNL is higher with lower value of standard
deviation. Thus, SCBNL is superior in term of ability to pay the short term obligations than
other sample banks.
4.3 Statistical Tools

The descriptive statistics used in this study consists of mean, standard deviation, minimum
and maximum values associated with variables under considerations. The descriptive
statistics are summarized on table 6.
50
Table 6
Descriptive Statistics
This table summarizes the descriptive statistics- mean values and standard deviation of
different variables used in this study during the period 2010/11 through 2019/20 associated
with three sample banks. ROA and ROE are the variables used to measure the financial
performance of commercial bank. The dependent variables used in the study are: ROA is
Return on assets, ROE is return on equity, the independent variables are; IR as investment
ratio, LR as liquidity ratio and CR as capital ratio.
c N Minimum Maximum Mean Standard Deviation

ROA 30 1.42 3.25 2.2417 0.4509
ROE 30 13.61 32.78 23.876 5.8874
CR 30 4.68 16.57 8.2593 2.7410
IR 30 38.70 88.31 69.141 12.7163
LR 30 10.98 37.52 21.8217 7.2508
Source: Appendix VI
The table 6 shows that the average return on assets (ROA) is 2.2417 percent with the
minimum value of 1.42 percent and maximum value of 3.25 percent. Return on equity (ROE)
ranges from minimum value of 13.61 percent to maximum value of 32.78 percent leading to
the average return of 23.876 percent. Similarly, the descriptive statistics for the independent
variable shows that investment ratio has minimum value of 38.70 percent and maximum
value of 88.31 percent leading to the mean of 69.141 percent. The average liquidity ratio of
the sample banks is noticed to be 21.8217 percent with a minimum value of 10.98 percent
and maximum value of 37.52 percent. Capital ratio ranges from minimum value of 4.68
percent to maximum value of 16.57 percent with an average of 8.2593 percent.
51
4.4 Test of Hypothesis
This section deals with analysis of relationship between dependent and independent variables
as stated in the hypothesis.
(a) Bank profitability with capital ratio
The beta coefficient of capital ratio with ROA has been found positive and statistically
significant at 1 percent level. The positive sign indicates that positive relationship between
capital ratio and return on assets which supports null hypothesis.Alternatively, the beta
coefficient of capital ratio with roe is found to be negative and statistically significant at 1
percent Level. The negative sign of beta coefficient indicates that there are statistically
negative relationship between capital ratio and ROE. Which supports the null hypothesis.
a) Bank profitability with investment ratio
The beta coefficient of investment ratio with ROA has been found negative andstatistically
significant at 5 percent level. The negative sign indicates that negative relationship between
investment ratio and return on assets which supports null hypothesis.
Alternatively, the beta coefficient of investment ratio with ROE is found to be negative and
statistically significant at 5 percent Level. The negative sign of beta coefficient indicates that
there are statistically negative relationship between investment ratio and ROE, which
supports the null hypothesis.
(b) Bank profitability with liquidity ratio
The beta coefficient of liquidity ratio with ROA has been found to be negative and
statistically significant at 1 percent level. The positive sign indicates that negative
relationship between liquidity ratio and return on assets which supports null hypothesis.
Similarly, the beta coefficient of liquidity ratio with ROE is found to be negative and
statistically significant at 5 percent Level. The negative sign of beta coefficient indicatesthat
there are statistically negative relationship between capital ratio and ROE. Which supports
the null hypothesis.
52
4.5 Major Findings

• The average ROE of NABIL, SCBNL and EBL is 24.31, 21.79 and 25.53
percent respectively. Similarly, standard deviation of NABIL, SCBNL and EBL
is 5095,
5.73 and 5.95 percent respectively.
• The CV of NABIL, SCBNL and EBL is 24.48, 26.29 and 23.31 percent
respectively. Therefore SCBNL bank has higher ROE with lower standard
deviation but if observation is done on the basis of C.V. EBL has higher ROE
with lower C.V. Thus, both banks are superior than NABIL bank due to lower
C.V. and standard deviation respectively.
• The average ROA of NABIL, SCBNL and EBL is 2.474, 2.327 and 1.924
percent respectively. Similarly Standard deviation of NABIL, SCBNL and EBL
is 0.480,
0.399 and 0.291 percent respectively.
respectively. Therefore EBL has higher of ROA with lower standard
deviation and coefficient of variation respectively.
• The average capital ratio of NABIL, SCBNL and EBL is 9.23, 10.73 and 7.391
percent respectively. Similarly, standard deviation of NABIL, SCBNL and EBL
is 1.7974, 2.8655 and 1.3 percent respectively.
respectively. Finally, by considering all the result in table 3, EBL bank is
superior to other banks.
• The average investment ratio of NABIL, SCBNL and EBL is 74.81, 54.21 and
78.402 percent respectively. Similarly standard deviation of NABIL, SCBNL
and EBL is 4.8568, 9.0031 and 4.8507 percent respectively.
respectively. Therefore EBL has maintained stable investment ratio as
compared to other sample banks.
• The average liquidity ratio of NABIL, SCBNL and EBL is 15.073, 26.076
and 23.686 percent respectively. Similarly, standard deviation of NABIL,
SCBNL and EBL is 2.8423, 5.0797 and 6.76 percent respectively.
respectively. Therefore, the liquidity ratio of SCBNL is higher with lower value
53
of standard deviation. Thus SCBNL is superior in term of ability to pay the

short term obligations than other sample banks.
54
• The average return on assets (ROA) is 2.2417 percent with the minimum
value of 1.42 percent and maximum value of 3.25 percent.
• Return on equity (ROE) ranges from minimum value of 13.61 percent to
maximum value of 32.78 percent leading to the average of 23.876
percent.
• Similarly, the descriptive statistics for the independent variable shows that
investment ratio has minimum value of 38.70 percent and maximum value of
88.31 percent leading to the mean of 69.141 percent.
• The average liquidity ratio of the sample banks is noticed to be 21.8217
percent with a minimum value of 10.98 percent and maximum value of 37.52
percent.
• Capital ratio ranges from minimum value of 4.68 percent to maximum value of
16.57 percent with an average of 8.2593 percent.
• The investment ratio is negatively related to return on assets which indicates that
higher the investment ratio lower would be the return on assets of the banks.
• The liquidity ratio is negatively related with return on assets indicating that
higher the liquidity ratio lower would be the bank performance measured by
return on assets.
• Further, relationship between capital ratio and return on assets is also found to be
positive indicating higher the capital ratio of the bank higher would be the
return on assets.
• The return on equity is negatively related to investment ratio. This indicates
that higher the investment ratio lower would be the return on equity.
• Similarly, correlation between capital ratio and return on equity found to be
negative indicating higher the capital ratio lower would be the return on
equity.
• The correlation between return on equity and liquidityratio is found to be
negative indicating higher the liquidity in the bank lower would be the return on
equity.
4.6 Discussions
Effective liquidity risk management helps ensure a bank's ability to meet its obligations as
they fall due and reduces the probability of an adverse situation developing (Ahmad, 2009).
Profitability and liquidity are effective indicators of the corporate health and performance of
55
not only the commercial banks, but all profit-oriented ventures (Eljelly, 2004). The
performance of commercial banks can be affected by internal and external factors
(Kosmidou, et al. 2008).
To measure the profitability of commercial banks, there are variety of ratios used of which
56
Return on Asset, Return on Equity and Net Interest Margin are the major ones (Murthy &
Sree, 2003). Several studies has been undertaken to inquire the major determinants of a
bank's profitability and liquidity has always remained one of the majordeterminants (Bourke,
1989). Vieira (2010) describe profitability business's ability to generate earnings as compared
to its expenses and other relevant costs incurred during a specific period of time. Potential
investors are interested in dividends and appreciation in market price of stock, so they pay
more attention on the profitability ratios. Niresh (2012) opined that liquidity is of major
importance to both the internal and external analysts' because of its close realationship with
day to day operations of a business.The correlation between ROA and CR is positive. It
means when capital is increased, the ROA of sample banks also increases. This result is
consistent with the finding mentionedby (Pradhan and Shrestha, 2016).
There is negative relationship between ROA and investment ratio. It means increasing in
investment, the ROA of sample banks is decreasing. This result is contradict with the finding
of (Alshati, 2014) and (Pradhan & Shrestha, 2016). There may be the lack of the proper
investment policies of sample banks in Nepal.
Similarly, the relationship between ROA and LR found to be negative. It means higher the
liquid assets lower the ROA. This result is consistent with (Pradhan and Shrestha, 2016) and
contradict with (Bourke, 1989) and (Alshati, 2014).
The correlation between ROE and CR is negative. It means increasing the capital provides
lower return to its shareholders. This result is contradict with the finding of (Pradhan and
Shrestha, 2016).
The correlation between ROE and IR is negative. It means higher the investment would
provide lower the return to its shareholders. This finding is contradict with (Pradhan &
Shrestha, 2016).
The correlation between ROE and LR found to be negative. It means higher the liquid assets
lower would be the profitability of sample banks. This result is consistent with thefinding of
(Pradhan & Shrestha, 2016) & contradict with (Alshati, 2014).
57
CHAPTER V
SUMMARY & CONCLUSION
This is the final chapter of the study. This chapter includes the overall summary of
this study. based on the findings of the study, conclusions were drawn and possible
recommendations were offeres for the strengthen the financial position of the sample
banks.
5.1 Summary
Banking sector plays an important role in the economic development of the country.
Commercial banks are one of the vital aspects of this sector, which deals with the process
of channeling the available resources in the needed sector. It is the intermediary between
the deficit and surplus of financial resources. In the absence of such institution it is not
possible that the saving will be safely and optimum utilized within the country. In recent
decades, Nepal has come through various vicissitudes politically, economically and
more. Commercial banks are one of the major core components of modern economy, yet,
they were not unaffected by those situations. On the other hand, bank and financial
institutions are in tight competition with one another within the industries as well. At this
situation, the commercial banks should be more competitive. They should become
financially healthy and must have growth potentially. In addition, they have to shape
their plans and strategies accordingly. Today, banks are under great pressure to meet the
objectives of their stockholders, employees, depositors, and borrowing customers, while
somehow keeping government regulators satisfied that the bank’s policies, loans, and
investments are sound. The majority of the needs of the stakeholders are related with the
profitability of the banks. Thus, the foremost objective of the bank is profit
maximization. As other types of business entity, commercial banks are also inspired by
the profit. In this age of great competition, only the profitable banks can sustain for a
long time. Financial policies of any concern are directly or indirectly influenced by its
profitability. Thus, it is a base for a bank's survival, growth and expansion. This research'
A Study on The Impact of Liquidity on Profitability of Commercial Banks In Nepal'
presents the financial mirror of showing the strength and weakness of the banks.Under it,
liquidity, profitability position and credit management and credit risk have beenanalyzed.
The main objective of the study is to compare and evaluate the financial performance
analysis of Joint Venture Commercial Banks of Nepal.
58
The average return on assets (ROA) is 2.2417 percent with the minimum value of 1.42
percent and maximum value of 3.25 percent. Return on equity (ROE) ranges from
minimum value of 13.61 percent to maximum value of 32.78 percent leading to the
average of 23.876 percent. Similarly, the descriptive statistics for the independent
variable shows that investment ratio has minimum value of 38.70 percent and maximum
value of 88.31 percent leading to the mean of 69.141 percent. The average liquidity ratio
of the sample banks is noticed to be 21.8217 percent with a minimum value of 10.98
percent and maximum value of 37.52 percent. Capital ratio ranges from minimum value
of 4.68 percent to maximum value of 16.57 percent with an average of 8.2593 percent.
The study has been organized in five major chapters- (i) Introduction, (ii) Review of
literature, (iii) Research Methodology, (iv) Results and Discussions, (v) Summary and
Conclusion. As per the nature of study, secondary data were used to perform the analysis
of the bank financial performance. The data were collected as per the requirement study
from the annual reports published on official website of selected sample banks,
periodicals of NRB. The data comprised of ten fiscal years of 2010/11 to 2019/20.
As a analysis tool, descriptive statistics were used to examine the data according to
the requirement study of the objective of the study. Correlation analysis and regression
analysis were performed to test the relationship between dependent and independent
variables. The return on equity (ROE) and return on assets(ROA). Total three
independent variables were chosen as explanatory variables. The regression model were
estimated to test the effect of bank specific variables and macroeconomic variables on
performance of Nepalese commercial banks.
The investment ratio is negatively related to return on assets which indicates that
higher the investment ratio lower would be the return on assets of the banks. The
liquidity ratio is negatively related with return on assets indicating that higher the
liquidity ratio lower would be the bank performance measured by return on assets.
Further, relationship between capital ratio and return on assets is also found to be
positive indicating higher the capital ratio of the bank higher would be the return on
assets. The return on equity is negatively related to investment ratio. This indicates that
higher the investment ratio lower would be the return on equity. Similarly, correlation
between capital ratio and return on equity found to be negative indicating higher the
capital ratio lower would be the return on equity. The correlation between return on
equity and liquidityratio is found to be negative indicating higher the liquidity in the
59
bank lower would be the return on

60
equity. The study also reveals that the bank specific independent variables have less
contribution in profitability performance of Nepalese commercial banks, since their
coefficients were found to ne not significant and different relationship with ROA and
ROE. However, still there are more internal and external factors affect the performance
of commercial banks which was expressed by regression analysis through R square
values.
5.2 Conclusions
Liquidity is a financial term that measures the amount of capital that is available for
investment. Today, most of this capital is credit fund. That is because the large financial
institutions prefer using borrowed money for investment. Low interest rates mean
creditis cheaper. Thus, businesses and investors are more likely to borrow. The return on
investment has to be higher than the interest rate to make investments attractive. In this
way, high liquidity spurs economic growth (Heffernan, 1996). The banking institution
had contributed significantly to the effectiveness of the entire financial system as they
offer an efficient institutional mechanism through which resources can be mobilized and
directed from less essential uses to more productive investments. Liquidity creation
itselfis seen as the primary source of economic welfare contributed by banks and also as
their primary source of risk.
Virtually every financial transaction or commitment has implications for bank’s
liquidity. In Nepalese context, it is found that liquidity ratio was relatively fluctuating
over the period, return on the equity is found satisfactory and there is positive
relationship between deposits and loan advances. It is also found that the liquidity and
banks’ loan are positively related to banks profitability and some authors revealed that
the capital adequacy and liquidity is positively associated with banks profitability.
The major purpose of this study is to determine the impact of bank liquidity on financial
performance. This study is based on secondary sources of data of three commercial banks
for the year 2010/11 to 2019/20 leading to the total observations of 30. Result revealed
that return on equity is negatively related to investment ratio. This indicates that higher
the investment ratio lower would be the return on equity. Similarly, correlation between
capital ratio and ROE is found to be negative indicating higher the capital ratio lower
would be ROE. The correlation between return on equity and liquidityratio is found to be
negative indicating higher the liquidity in the bank lower would be the return on equity.
The beta coefficient is negative for capital ratio with return on equity. It indicates the
61
increase in capital will decrease in profitability (ROE).Similarly the beta coefficient of

liquidity ratio is negative with ROE. It also indicates that increase in Liquid assets
decreases the profitability of banks. The combination of IR and CR is negatively
significant with return on equity. It indicates that increase in investment and capital
decreases the return on equity. The combination of investment ratio and liquidity ratio,
capital ratio and liquidity ratio and investment ratio, capital ratio and liquidity ratio are
negatively significant with return on equity.
Similarly, return on assets is negatively related to investment ratio. This indicates that
higher the investment ratio lower would be the return on assets. Correlation between
capital ratio and ROA is found to be positive indicating higher the capital ratio higher
would be ROA. The correlation between return on assets and liquidity ratio is found to
be negative indicating higher the liquidity in the bank lower would be the return on
assets. The beta coefficient is negative for investment ratio with return on assets. It
indicates the increase in investment will decrease in profitability (ROA). The
combination of IR and LR is negatively significant with return on assets. It indicates that
increase in investment and liquidity decreases the return on assets. The combination of
investment ratio, capital ratio and liquidity ratio are negatively significant with return on
assets.
This study concludes that liquidity status of the bank plays important role in banking
performance in case of Nepalese commercial banks. This study revealed that investment
ratio, liquidity ratio and capital ratio have negative impact on bank performance. The
study suggests that banks willing to increase bank performance should maintain adequate
level of capital, investment and liquidity.
5.3 Implications
The competitive environment of the financial intuitions is so drastic that any commercial
bank that aims to survive must be fully aware of the consequences of its liquidity and
profitability obligations as both variables can make or destroy its future. Liquidity and
profitability in commercial banks are two important issues in the operation, survival,
sustainability, growth and performance of banks. In order to avoid negative shocks that
occurs unusually and to maintain a good financial stability in the banks, the financial
managers, policy makers, regulators and stakeholders should identify the impact of
liquidity on profitability of commercial banks and should also aware about what kind of
relationship exists between those variables of banks. Hence this research paper had
attempted to analyze the impact of liquidity on profitability of Nepalese commercial
62
banks for ten fiscal years from 2011/12 to 2020/21.

Further studies can be carried out on the basis of the finding of this study in the same
way or different field from this study. There are many implications for future researchers,
managers, shareholders, regulators and so on. The study can help managers in banks to
make accurate financial decisions that will satisfy the stakeholder’s interest with regards
to liquidity and profitability needs of the investors. In addition the findings of the
research revealed that changes in level of liquidity does affects profitable situation, so it
enables managers to revise and adopt relevant strategies regarding profitability with
concerning the level of liquidity are present in profitable banks. This will help them to
formulate rules and regulation that help to minimize failure risk in the banking sector.
Similarly, it will be also helpful for other financial intuitions to formulate plans and
policies based on the findings of this research. The study had covered only the liquidity
part and it was conducted using limited ratios. So the researchers in future, who will
conduct research in the same field can use various other ratios and more advanced
statistical and accounting tools, techniques in order to get better results. The secondary
analysis was done by using descriptive statistics, correlation and regression analysis. So,
the researcher in future may consider other analysis such as test of normality test and so
on for more accurate results and conclusions. The interested researchers can also do the
same area of this research extensively using a wider data and area of coverage.
The study had analyzed the impact of liquidity on profitability. Such information could
protect commercial banks against failure and enhance their performances and also
disclose what will happen to one factor as a results of a change in others. This study had
proved that profitability of bank was affected by the liquidity. If bank hold high level of
liquidity, profit of bank will decrease and vice versa. So bank should try to maintain
adequate level of liquidity.
63
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Website
www.everestbankltd.com
www.google.com
www.nepalstock.com
www.nrb.org.np
www.sebonp.com
www.nabilbank.com
www.scbnl.com
APPENDICES
APPENDIX – I
Return on equity
F/Y NABIL (%) SCBNL (%) EBL (%)

2011/12 29.02 30.43 29.91
2012/13 30.25 28.36 27.14
2013/14 32.78 26.38 31.52
2014/15 27.97 26.27 29.02
2015/16 22.73 21.69 23.25
2016/17 25.61 17.18 20.61
2017/18 22.41 14.31 17.20
2018/19 20.94 18.66 15.81
2019/20 17.76 19.49 32.33
2020/21 13.61 15.15 28.49
Average 24.31 21.79 25.53
S.D. 5.95 5.73 5.95
C.V. 24.48 26.29 23.31
APPENDIX – II
Return On Assets

2011/12 2.43 2.55 1.98
2012/13 2.8 2.80 2.11
2013/14 3.25 2.67 2.39
2014/15 2.89 2.51 2.25
2015/16 2.06 1.99 1.85
2016/17 2.32 1.98 1.61
2017/18 2.69 1.84 1.72
2018/19 2.61 2.61 1.97
2019/20 2.11 2.61 1.94
2020/21 1.58 1.71 1.42
Avg. 2.474 2.327 1.924
S.D. 0.480 0.399 0.291
C.V. 19.40 17.15 15.12
APPENDIX – III
Capital Ratio

4.68 7.52 5.91
2011/12
5.16 8.38 6.68
2012/13
5.56 8.39 6.44
2013/14
5.93 9.89 6.63
2014/15
6.10 10.12 6.97
2015/16
6.11 9.54 6.86
2016/17
6.38 9.16 6.90
2017/18
8.89 11.54 7.25
2018/19
9.02 15.33 9.19
2019/20
10.32 16.57 10.36
2020/21
9.23 10.73 7.391
Avg.
1.7974 2.8655 1.3
S.D.
26.3738 26.921 17.763
C.V.
APPENDIX – IV
Investment Ratio

74.97 38.70 73.58
2011/12
71.17 45.35 77.43
2012/13
80.30 48.49 80.57
2013/14
77.92 54.43 75.36
2014/15
74.91 57.84 77.36
2015/16
74.67 56.11 71.82
2016/17
64.42 48.32 75.37
2017/18
70.91 56.17 79.12
2018/19
76.47 67.08 85.10
2019/20
82.35 69.63 88.31
2020/21
74.81 54.21 78.402
Avg.
4.8568 9.0031 4.8507
S.D.
6.4923 16.61 6.1871
C.V.
APPENDIX – V
Liquidity Ratio
11.61 30.03 17.37
2011/12
13.99 24.39 16.69
2012/13
15.35 28.04 15.98
2013/14
13.88 32.59 23.06
2014/15
14.32 23.46 17.49
2015/16
18.05 20.95 37.52
2016/17
20.69 26.17 30.32
2017/18
14.07 16.87 28.74
2018/19
10.98 33.37 26.64
2019/20
17.79 31.19 23.05
2020/21
15.073 26.076 23.686
Avg.
2.8423 5.0797 6.76
S.D.
18.86 19.02 28.5428
C.V.
APPENDIX – VI
Descriptive Statistics
c N Minimum Maximum Mean Standard

Deviation
ROA 30 1.42 3.25 2.2417 0.4509
ROE 30 13.61 32.78 23.876 5.8874
CR 30 4.68 16.57 8.2593 2.7410
IR 30 38.70 88.31 69.141 12.7163
LR 30 10.98 37.52 21.8217 7.2508

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THE IMPACT OF LIQUIDITY ON PROFITABILITY

OF COMMERCIAL BANKS IN NEPAL

A Dissertation Submitted to The Head of Research Department , Nepal Commerce

Rabindra Kumar Karki

This is to certify that the

Dissertation Submitted by:

Rabindra Kumar Karki

THE IMPACT OF LIQUIDITY ON PROFITABILITY

……...…….……....…… ….……………....………… ..……..…………….

Dissertation Proposal Defended Date:

Name of Supervisor: Lok Bahadur Rai

Name of head of Research committee: Asso. Prof. Dr.Jitendra Pd. Upadhyay

Position: ………………………………… Dissertation Viva-Voce

We have examined the dissertation entitled “The Impact of Liquidity on Profitability

Lok Bahadur Rai

Asso. Prof. Dr.Jitendra Pd. Upadhyay

Rabindra kumar karki

Chapter I: Introduction 1-14

Chapter III: Methodology 28-34

3.1 Research Design 28

Chapter IV: Results and Discussions 35-48

Chapter V: Summary and Conclusions 59-64

Table No.1 Return on Equity 35

Figure No.1 Return on Equity 36

This study examines the impact of liquidity on profitability of Nepalese commercial

Correlation between capital ratio and return on equity found to be positive

1.1 Background of the Study

Studies of Nepalese banks’ profitability are important as guidance towards enhancing

1.1.1 Development of Banking in Nepal

In a view of the various development programs launched after the beginning of

1.1.2 A Brief Profile of NABIL Bank Limited (NABIL)

Nabil is a milestone in the development of financial services industry in Nepal. Entry of

1.1.3 A Brief Profile of Everest Bank Limited

a) Joint Venture Partner

The capital composition of Everest bank Ltd. is as given below:

1.1.4 A Brief Profile of Standard Chartered Bank Nepal Ltd.

Standard Chartered Bank is a leading international banking group with a 160-year

The Bank believes in delivering shareholder value in a socially, ethically and

1.2 Problem Statement

ii) Do sample banks manage and utilize their assets effectively?

iii) Do sample banks succeed to provide sufficient return to their shareholders?

iv) What is the Liquidity position in Nepalese commercial Banks?

v) What is the profitability status in Nepalese commercial Banks?

1.3 Objectives of the Study

i. To examine the existing position of selected bank performance indicators,

ii. To analyze the impact of liquidity on profitability of Nepalese commercial banks,

1.4 Research Hypothesis

2. H12: There is no significant relationship between investment ratio and profitability.

3. H13: There is no significant relationship between liquidity ratio and profitability.

1.5 Rational of the Study

1.6 Limitations of the Study

2.1 Conceptual Review

2.1.1 Concept of Liquidity

Liquidity is an important principle of bank lending. According to the principle of liquidity,

2.1.2 Importance of Liquidity

2. Liquidity is important to maintain statutory liquidity ratio in banks.

3. Liquidity is important and inevitable factor to advance loan.

4. Liquidity is needed to pay dividend to their shareholders.

2.1.3 Capital Ratio

2.1.4 Investment Ratio

2.2 Review of Previous Studies

2.2.2 Review of Thesis

Gautam (2012) conducted case study on "A Study on Financial Performance of