Professional Project: Liquidity's Impact on Nepal Commercial Banks

This professional project examines the impact of liquidity on the profitability of commercial banks in Nepal. The research includes an introduction outlining the problem statement, research aims, and questions. A literature review explores the concepts of liquidity, its relevance in deposit money banks, expected income theory, demand and supply dynamics, and liquidity risk. The methodology section details data collection procedures and analysis techniques. The data analysis utilizes descriptive statistics and correlation to assess the relationship between liquidity and profitability. The discussion chapter interprets the findings, followed by a conclusion that addresses the research questions, limitations, and recommendations for future studies. The project aims to assess the profitability and liquidity scenarios of commercial banks in Nepal and determine the effect of liquidity on their financial performance.

Running head: PROFESSIONAL PROJECT
Impact of liquidity on profitability of commercial banks in Nepal
Name of the Student:
Name of the University:
Author’s Note:

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PROFESSIONAL PROJECT
Executive Summary
This paper has been constructed in order to have an idea about the impact of liquidity on the
profitability of the commercial banks in Nepal. The introduction of the paper has looked to
highlight the background of the study and the problems that has encouraged the researcher to
undertake a research on this topic. The research aims and questions have been framed in
order to have an idea about the factors that have been determined in order to complete the
paper. The literature review provides an idea about the assessments and the answers given by
the previous researchers on similar topics and accordingly the process of data gathering and
the data analysis method can be ascertained. The data analysis has been undertaken by
collecting the data from the selected banks that are functional in Nepal and this has been
helpful in determining the results that are required in the research paper.

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Table of Contents
Chapter 1: Introduction..............................................................................................................4
1.1 Problem Statement...........................................................................................................4
Research Aims and Objectives...............................................................................................5
Research Questions................................................................................................................5
Chapter 2: Literature Review.....................................................................................................6
2.1 Concept of liquidity..........................................................................................................6
2.2 Liquidity Relevance in Deposit Money Banks................................................................7
2.3 Expected Income Theory.................................................................................................7
2.4 Demand and supply of liquidity.......................................................................................8
2.5 Liquidity Risk...................................................................................................................9
Chapter 3: Research Methodology...........................................................................................10
3.1 Data Collection Procedures............................................................................................10
3.2 Data Analysis.................................................................................................................11
Chapter 4: Data Analysis.........................................................................................................12
4.1 Descriptive Statistics......................................................................................................12
4.2 Correlation......................................................................................................................13
Chapter 5: Discussion..............................................................................................................15
5.1 Descriptive Statistics......................................................................................................15
5.2 Correlation......................................................................................................................15
Chapter 6: Conclusion, Recommendation and Limitation.......................................................16
6.1 Conclusion (Addressing the research aims and questions)............................................16

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6.2 Limitations.....................................................................................................................16
6.3 Recommendation............................................................................................................17
Reference List..........................................................................................................................18
Appendix..................................................................................................................................21

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Chapter 1: Introduction
In the modern world there has been a development various organizations and along
with that there has been rise in transactions among the banks, individuals and companies.
There has been a rise in the operational activities of the commercial banks with the rise in the
transactional activities among the organizations and even among the individuals.
Pradhan, & Shrestha (2016) has cited that managers of the commercial banks takes
the responsibility of managing the management of the liquidity in order to compute the loan
and the deposit which acts as a correlation among the profitability of the banks while on the
other hand, Pradhan, & Khadka (2017) recognises that liquidity assesses the capability of the
business in order to satisfy the payment of the present accountabilities which is inclusive of
the financial and operating costs during the short term and even during the maturity of the
long term debts.
The extent of liquidity indirectly transforms the segment of the profitability and
Gizaw et al., (2015) has explained that liquidity is a fundamental factor to evaluate the
profitability as well as bigger financial crisis and stability. The risk can be compared and
assessed with the liquidity ratio while the bank has an increased level of liquidity ratio which
explains the low returns and decreased level of risk (Pradhan, & Manandhar 2017). This
paper therefore looks to assess the impact of liquidity on the profitability of the commercial
banks in Nepal.
1.1 Problem Statement
The statement of the problem explains the factor and the reason why this kind of
researches have been undertaken in accordance to this topic. The commercial banks that are
functioning in Nepal have their own individual goals and policies and therefore they operate
in the economy in order to attain the same. Profitability is one of the key concerns of the bank

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and a bank without profit would be unable to function in the economy of Nepal (Alshatti,
2015). The extent of profitability has a key impact and therefore it becomes essential to
determine the impact of liquidity on the profitability of the commercial banks in Nepal. The
assessments of the various ratios that are associated to the profitability of the banks in Nepal
are assessed and thereby an idea has been attained in accordance to which the answer to this
research can be obtained.
Research Aims and Objectives
The research has the key aim and objective of evaluating the extent of profitability of
the commercial banks by relying on the total assets. The distinct objectives of the paper have
been to attain the key objectives. The main objectives are as follows:
 To assess the position of profitability of the commercial banks in Nepal
 To evaluate the liquidity scenario of the commercial banks in Nepal
 To assess the effect of liquidity on the profitability of the commercial banks in Nepal
Research Questions
The research questions are as follows:
Q1. What is the extent of profitability of the commercial banks in Nepal?
Q2. What is the liquidity scenario of the commercial banks in Nepal?
Q3. Does liquidity have an impact on the profitability of the commercial banks in Nepal?

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Chapter 2: Literature Review
2.1 Concept of liquidity
According to Abdullah, & Naser (2015), liquidity is a measure to the level to which
an individual or a company has their level of cash in order to satisfy the immediate and the
short term assets and obligations that can be converted in order to do this. Liquidity can even
be understood as a measure of the ease and the capability with the help of which the asset can
be converted quickly into cash. The liquid assets are those assets that can be quickly
converted into cash in order to satisfy the financial accountabilities for instances the liquid
assets are inclusive of the reserves of the central bank, cash and government debts. In order to
remain viable the banks and the financial organizations needs to have sufficient liquid assets
in order to satisfy their short term liabilities like the withdrawals undertaken by the depositor.
According to Marahatta et al., (2016), liquidity can even be termed as the capacity of
the banks to increase their funding in the assets and satisfy the unexpected and expected cash
and the warranty obligations at economical costs and by not incurring the losses that are
unacceptable. Liquidity is even known as a financial term that refers to the amount of capital
that is available for the purpose of investment. In the current economy, most of the capital is
known as credit and not cash. The liquidity of the banks generally means the capability of the
banks to preserve adequate funds in order to pay out for their obligations of maturity
(Mekonnen, 2015). It is the ability of the banks to meet the cash immediately and even the
other obligations of withdrawal and legitimate the demand for new loans while staying in line
with the current requirements of the reserve.

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2.2 Liquidity Relevance in Deposit Money Banks
According to Claessens, & Horen (2014), banking liquidity computes the cash
availability and the rate at which the current assets are altered into cash in order to satisfy the
extra and the ordinary requests. There have been numerous scholars who have observed
liquidity as a measure for the bargaining power of the banks and their strengths as well.
Mendoza, & Rivera (2017) has viewed that more efficient a deposit money bank is during the
management of their liquidity, the stronger is the capability to give out loanable funds.
Sufficient amount of liquidity aids a bank to meet their three risks which are known as the
funding risk, time risk the lending risk. The supervision and management of the deposit
money of the liquidity of the banks decreases the probability of increasing the loans under
undesirable contracts, limitations and at an increased interest bearing expenses (Sharma,
2016). The process of liquidity management in the deposit money banks even decreases the
level of bankruptcy and liquidation which are actually an outcome of liquidity and thereby
aids in safeguarding the deposits of the consumers. In order to conclude in a simple manner,
the liquidity aids to maintain and develop public confidence of the depositors and the
financial markets. In case the financial market notices to have the banks face liquidity issues,
the banks may not be allowed to bring in additional funds and of permitted, it would be at a
higher premium (Ghimire et al., 2016). Furthermore, monitoring of the liquidity also acts as a
measure with the help of which the over liquidity and under-liquidity which can have a
negative effect on the extent of profitability can be restricted.
2.3 Expected Income Theory
This theory tries to explain that the liquidity of the banks can be controlled with the
assistance of effective management and modelling the commitments of the loan that has been
made by the banks to their customers. In this scenario, liquidity can be planned if the
redemption of the loan that is scheduled in undertaken by a bank to the customers. by looking

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into the future of the borrower (Opoku, 2016). In accordance to Shah, & Pradhan (2017), the
theory stresses on the income potential and the credit worthiness of an individual borrower as
the most extensive guarantee for ensuring sufficient amount of liquidity. This theory has
therefore unfenced many deposit money banks to incorporate a developed investment
collection.
2.4 Demand and supply of liquidity
The commercial banks require sufficient amount of liquid assets in order to satisfy the
immediate financial requirements of the customers and the banks to gather the funds in order
to satisfy the customer demands (Aspal, & Nazneen 2014). There are two sorts of sources in
order to understand the demand for the expense funds of the banks and the resources have
been the withdrawal deposited money from the accounts and the requests for credit from the
consumers that may in the form of a new request for loan, renewal of the loans that are
existent or drawing on the current facilities of credit. The other liquidity demand sources are
paying off the past borrowings like the loans received by the banks from the central or the
other commercial banks (Shrestha, 2016). In the same manner the income tax payment or the
cash dividend to the shareholders increases to the demand for the distinct fund. The most key
sources for a bank is the receipt from the deposits of a new customer. The banks can create
funds from the selling of the marketable securities like the treasury bonds and bills from the
portfolio of the investments (Pandey, 2018). The banks can raise the liquidity flow from the
profit that is established by selling off the non-deposit services and from borrowing from the
money market with the help of the division of the treasury.

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2.5 Liquidity Risk
The risk related to liquidity takes place in the banks when the financial obligations of
the customers are not accomplished within the desired time frame or the inability to satisfy
their obligations when they become due without having any unexpected losses (Boadi et al.,
2016). Liquidity risks even takes place from the failure to recognise the transformations of
the market scenarios that have an impact on the capability to liquidate the assets faster and
with the least amount of loss in the value (Olawumi et al., 2017). There are numerous sources
that leads to liquidity risks if the banks are recognised with unanticipated transformations in
the capital cost, abnormal financial market behaviour and the risks that generates from the
macroeconomic imbalances and secondary sources.

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Chapter 3: Research Methodology
The research methodology of the paper looks to examine the data that would be
obtained an the process of data collection with the help of which effective and precise data
can be gathered from the purpose of undertaking the analysis of the research paper and
thereby discovering the answers that are effective for the research.
3.1 Data Collection Procedures
The objective of data collection of the research is to determine the impact of liquidity
on the profitability of the commercial banks in Nepal. This research is in nature descriptive
and is reliant on the secondary data sources in order to undertake an extensive research. In
this research paper, the researcher has exploited the general secondary data sources as the
secondary data have been obtained from several journals, books, internet websites and the
annual reports of the banks that are operating in Nepal (Aftab et al., 2015). Secondary data
has been even obtained from the past researches and these has been an cost efficient and cost
reducing strategy. The secondary data can even be useful for highlighting the present
problems and it is reasonable as it reduces the cost for the collection of the primary data. The
data that are garnered are quantitative in nature and the gathering of the methodology for the
research paper explains the empirical methodology and the estimation of the future process
that would be exploited (Islam, & Nishiyama 2016).
The research has even collected information from the IPFS, from where the data
related to the banks operating in Nepal has been collected and thereby the paper can move
forward. The premium data in accordance to the banks in Nepal was not gathered as these
data were inaccessible to the researcher.

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3.2 Data Analysis
This research has focused on collecting quantitative data and this data would be
evaluated by taking help of the quantitative data assessment method. Rani, & Zergaw (2017)
have cited that quantitative data analysis process is a systematic method to undertaken
examinations within which the numerical data is gathered and the research changes the data
that is gathered into numerical data. It generally explains the events and the situations and
thereby assisting in explaining the issues related to the research. This process aids in
computing the attributes related to the topic. The researcher would look to examine the
dependent variable with the independent variable in order to have certain idea about how
liquidity has an impact on the profitability of the commercial banks (Abdellahi et al., 2017.
The data has undergone various mechanisms with the help of which the results that are
desired can be attained.