Liquidity and profitability of financial institutions in Sri Lanka

Abstract

The financial institutions have to be highly concentrated on developing sound techniques for proper trade off between liquidity and profitability due to its highly deal with ensuring adequate liquidity assets than non- financial institutions to meet the customers’ demands. Therefore the aims of this study are to examine the degree and pattern of determinants of liquidity on profitability of financial institutions in Sri Lanka for the period from 2009 to 2013. The study covers 16 Banks and Finance Companies listed on the Colombo Stock Exchange.For these objectives, the study used Cash Position Indicator (CPI), Capacity Ratio (CR) and Total Deposit Ratio (TDR) as independent variables to measure the liquidity level to examine its determinants on Return on Assets (ROA) of financial institutions in Sri Lanka. The correlation and regression model are used as statistical tools for hypotheses testing to draw final conclusions. The findings reveal that CPI and TDR have significant determinants on ROA with sign of positive and negative respectively while CR has insignificance on ROA of Banks and Finance Companies in Sri Lanka. The overall finding from regression model is that 30% of variation in profitability (ROA) is explained by variation of liquidity of Banks and Finance Companies in Sri Lanka. Further, the liquidity has negative and significant impact on profitability of financial institutions in Sri Lanka. The finding is more useful to finance decision makers of financial institutions for taking sound decisions on proper trade off between liquidity and profitability.