Optimizing Financial Performance: Deciphering the Interplay of Liquidity and Profitability in Bank Muscat, Sultanate of Oman

Abstract

This study explores the intricate relationship between liquidity and profitability at Bank Muscat, Oman, examining various financial indicators such as Cash Reserve Ratio (CRR), Total Deposits to Total Assets (TDTA), Capital Adequacy Ratio (CAR), Total Loans to Total Deposits (TLTD), Liquid Assets to Total Assets (LATA), Liquid Assets to Total Deposits (LATD) and Liquidity Risk Exposure (LRE). The findings reveal that Liquid Assets to Total Assets (LATA) significantly correlates with Return on Assets (ROA), while other indicators show varied relationships. Notably, the Capital Adequacy Ratio (CAR) has a substantial negative impact on both ROA and Return on Equity (ROE). Cash Reserve Ratio (CRR), Total Deposits to Total Assets (TDTA), and Total Loans to Total Deposits Ratio (TLTD) have significant impact on ROE. Regression models exhibit exceptional explanatory power, highlighting liquidity and financial indicators' role in explaining profitability variability. Despite some liquidity ratios affecting profitability, others like Liquid Assets to Total Assets (LATA), Liquid Assets to Total Deposit Ratio (LATD), and Liquidity Risk Exposure (LRE) lack conventional significance levels. The recommendations encompass optimizing liquidity management, fortifying capital adequacy, monitoring deposit-to-asset ratios, evaluating liquidity risk exposure, assessing liquid asset allocation, and implementing dynamic risk management frameworks. Future research should consider comparative analyses across banks or regions, advanced statistical methodologies, and exploration of nuanced factors influencing liquidity-profitability dynamics, contributing to comprehensive financial management strategies for banks.