The Impact of Liquidity and Efficiency on Bank Performance or Profitability: Evidence from Afghanistan

Abstract

This paper aims to find out the effects of efficiency and liquidity on the profit of commercial banks in Afghanistan. The dependent variable of profitability was measured by different financial indicators, the indicators were: return on assets (ROA), return on equity (ROE), operating profit ratio (OP), net interest margin (NIM), net interest income (NII). The two independent variables of efficiency and liquidity were measured in form of cost to income ratio (CI), loans to total assets (LA), total customer deposits to total assets (CDA), and loans to deposits ratio (LD). Data of 10 commercial banks was collected between 2016 and 2022, and a variety of statistical analysis methods along with financial measures were applied to the data to verify the research hypotheses. The results of the research showed that the H1, H2 and H5 were rejected showing that in some cases efficiency and liquidity did not influence the certain profitability measures substantially. Conversely, the hypothesis numbers three and four were accepted, which implies that efficiency, as well as liquidity, had a stronger impact on the other profitability measures. On the basis of these findings, the study has suggested that the following are some of the recommendations that should be made to the Afghan commercial banks in as far as liquidity enhancement is concerned: developing more effective strategies with regard to liquidity management by the Afghan commercial banks. Through this way, they will be able to better their position so that they enhance profitability. Additionally, the paper proposes that some more studies should be done in this direction to investigate more aspects in playing the role of influencing bank performance in Afghanistan and also the permanent outcomes of efficiency and liquidity on the profitability.

Keywords: Profitability, Assets, Deposits, Equity, Liquidity, Loans.