Abstract:
This research investigates factors affecting liquidity of banks operating in Pakistan.
Spanning from 2007 through 2016 the sample of the study includes 23 banks by employing
relevant econometric specifications. The findings reveal that the internal factors such as
capital adequacy ratio (CAR), cost of funds and bank size are statistically significant but
differently related to the liquid asset to total asset ratio and to the total loans to total deposit
ratio, respectively. The study finds that external or macro factors, such as GDP is
statistically significant but affect liquidity of the banks differently. Unemployment, another
external factor, also impact liquidity of banks very differently but it is statistically significant
in the first measure of liquidity and statistically insignificant in the second measure of
banks’ liquidity. Further, the results revealed that profitability is insignificantly related to
liquidity while the relationship between deposits and bank liquidity is negative and
statistically significant.
