The Impact of Bank Internal and External Factors on the Commercial Bank’s Liquidity: Empirical Evidence from Pakistan

Abstract

The purpose of this research is to identify internal and external factors affecting the liquidity of Pakistani banks. Bank balance sheets and income statements were used to calculate study variables. With panel data, the random effect method was used to analyze data from ten domestic and international commercial banks active in Pakistan from 2011 to 2020. This study has analyzed liquidity, which has been measured by two liquidity ratios cash and marketable securities to total assets liquidity 1 and loans to deposits liquidity 2. In the study, internal factors include bank size, return on assets, and cost of funds, capital adequacy, and non-performing loans. The external factors are GDP and inflation. In this study, bank size increased liquidity 1 and decreased liquidity 2, but both were significant. The return on assets liquidity 1 has increased significantly, but the return on assets liquidity 2 has increased insignificantly. The cost of funds has increased liquidity 1 and decreased liquidity 2 but has an insignificant effect on liquidity. The capital adequacy ratio has decreased significantly and insignificantly effect on both liquidities. Non-performing loans have increased liquidity 1 significantly and decreased liquidity 2 insignificantly. GDP has increased liquidity 1 significantly and decreased liquidity 2 insignificantly. Inflation has increased liquidity 1 significantly and decreased liquidity 2 insignificantly.