Factors Affecting Liquidity of Banks: Empirical Evidence from the Banking Sector of Pakistan

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.