Investigating the Impact of Liquidity on Profitability of Commercial Banks in Botswana

Disele, Thapelo

Investigating the Impact of Liquidity on Profitability of Commercial Banks in Botswana

Thesis / Dissertation

2023

Abstract

This study empirically investigates the relationship between liquidity and profitability of commercial banks in Botswana, by adding to the sparse existing research from a developing country perspective. A random effects panel regression technique was adopted to evaluate monthly bank level data from 2012 – 2021. Liquid Asset Ratio was chosen as the key liquidity explanatory variable for the statistical models, whilst Return on Assets is the primary performance measure. For robustness check, Return on Equity is used as a supplementary financial performance measure. The empirical evidence concluded that there is a statistically significant negative relationship between liquidity and profitability. The research findings are particularly relevant for bank managers and supervisors to help enhance knowledge of liquidity risk management, strengthen effective liquidity supervision and help device new standards and measures that strengthen the resilience of the banking sector against any potential catastrophic liquidity related shocks. Additionally, the findings of this study provide pertinent and meaningful insights required for ensuring financial sector soundness and macroeconomic stability. Key words: Liquidity, profitability, performance.

Keywords

Commerce

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