Abstract:
Commercial banks play a crucial role in the development of a country. A sound,
progressive, and dynamic banking system is a major requirement for economic
development. As an ultimate phase of the tertiary sector of an economy, commercial
banks act as the backbone of economic growth and prosperity by acting as a catalyst
within the process of development. They instruct the habit of saving and mobilize funds
from several small households and business firms spread over a geographical
region. Asset Liability Management (ALM) plays an important role in
weaving together the various business lines in a financial institution. Managing
liquidity and the financial positions are crucial to the existence of a financial
institution and sustenance of its operations. It is also essential for seamless growth of
the financial position. This study examined the effect of asset liability management on
the liquidity risk of domestic licensed commercial banks in Sri Lanka. For this purpose,
10 domestic licensed commercial banks were selected. The data used for this study
were collected from the bank’s annual reports for the period 2009 -2016. It was
analyzed using correlation and regression. The study established that liquidity risk can
result into experiencing adverse operational and financial problems such as decline in
investor confidence, panic withdrawals and daily operation problems. Hence, banks
attempt to control asset liability management factors such as capital adequacy ratio,
return on equity, return on assets, loans to deposits ratio and total assets of commercial
banks by balancing cash inflows and outflows. According to the results of regression
analysis capital adequacy ratio, return on equity, return on asset, loan to deposit ratio
positively effect on liquidity risk at the same time size of the bank negatively effect on
liquidity risk. There is a need for commercial banks to place greater emphasis on
developing an integrated view of risk across all types of risks, and the banks operational
areas while ensuring that the asset management committee introduces and implements
tighter regulations and reporting requirements with tighter capital requirements and
symmetrically greater liquidity creation
