Impact of liquidity risk on the performances of Sri Lankan commercial banks

Abstract

This study investigates the impact of liquidity risk on the performance of commercial banks in Sri Lanka by analysing secondary panel data of six systemically important banks in the Sri Lankan financial system from 2006 to 2016. The objective of this study is to identify the significant liquidity risk factors and the impact of them on both top line and bottom line performance indicators of commercial banks. Researchers find that liquidity gap and non-performing loan ratio are the significant proxies for liquidity risk. Multiple regression analysis reveals that liquidity risk negatively and significantly affects bottom lines Return on Average Assets (ROAA) and Return on Average Equity (ROAE), whilst positively affects the top line Net Interest Margin (NIM) of the commercial banks. The findings of this study suggest that expenses of the banks should be controlled with better liquidity management to enhance bottom line performances.