Abstract
Bank liquidity plays an important role in determining the bank’s financial performance. This study examines the impact of liquidity on the financial performance of ten Kuwaiti banks, whose shares are listed on the Kuwait Stock Exchange in the period 2010-2018. The article is based on the analysis of return on assets (ROA) and return on equity (ROE) as indicators of the bank’s financial efficiency in comparison with the five liquidity ratios. The results of the study showed a statistically significant direct relationship between ROA and the ratio of loans to total assets, the ratio of loans and deposits and the ratio of the financing deficit to total assets. According to the results of the calculations, a statistically significant inverse relationship between the ROA of liquid assets and the total assets and the ratio of liquid assets and deposits. The determination of return on equity (ROE) showed their statistically significant feedback only on liquid assets and deposits, while a significant direct relationship with the ratio of loans to total assets, the ratio of loans to deposits and the deficit of funding to the total assets. The results of this study provide an explanation of the contradictory results presented in the literature on the impact of liquidity on the financial results of banks. They found that the direction of the relationship depended on which financial ratio was used to explain the relationship (in this study, two ratios showed feedback, while the other three showed a direct ratio). The lack of a universal liquidity ratio will eventually lead to conflicting results. Keywords: liquidity, financial indicators, financial results, Kuwait banks, Kuwait Stock Exchange.
Highlights
Liquidity management is an important tool for the management of organizations; it reflects the organization’s ability to repay short-term liabilities. Amengor (2010) defines liquidity in commercial banks as its ability to fund all contractual obligations as they fall due
This study was set to examine the effect of liquidity on the financial performance of ten Kuwaiti banks over the period 2010-2018
Examining the effect of five liquidity ratios on the financial performance of the banks, using return on assets (ROA) and return on equity (ROE) as financial performance proxies, revealed that all five liquidity ratios used in this study had a significant effect on return on assets (ROA) while only four of them had a significant effect on return on equity (ROE)
Summary
Liquidity management is an important tool for the management of organizations; it reflects the organization’s ability to repay short-term liabilities. Amengor (2010) defines liquidity in commercial banks as its ability to fund all contractual obligations as they fall due. Amengor (2010) defines liquidity in commercial banks as its ability to fund all contractual obligations as they fall due. These obligations may include lending and investment commitments and deposit withdrawals and liability maturates, in the normal course of business. The main objective for any bank is to maximize profitability which is made of interest rate differential between loans and deposits and investments returns and since deposits are payable upon demand, managing healthy liquidity level while at the same time maximizing profit becomes central issues in banking. While liquidity is the main concern for depositors since it indicates the bank ability to accommodate their withdrawal needs which are normally on demand or on a short notice as the case may be (Olagunji et al, 2011). Nzotta (1997) stated that banks should pay more attention to borrowers’ worthiness to ensuring adequate liquidity
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