Impact of Liquidity Risk on Bank profitability: Case study of Commercial banks of Pakistan

Abstract

Every sector of the financial system is responsible for putting appropriate financial procedures into place in order to adapt to the ever-changing conditions of the market. This study examines the influence of liquidity position on the profitability of 22 Pakistani commercial banks from 2006 to 2022 by applying the Generalized Method of Moments (GMM) using annual data, with an aim to enhance their profitability and maintain a balanced approach.

It is found that there is an inverse and significant effect of liquidity, credit risk, and firm size on banks’ profitability, while a positive and statistically significant influence of banks’ capital on profitability is observed. Gross domestic product is found to negatively influence banks’ profitability due to fluctuations, while lack of consumer price index anticipation entails a negative impact on the performance of Pakistani banks.

Therefore, it is recommended that stable policies should be formulated for strengthening the banking sector and for diversifying and balancing liquidity measures. The banking system in Pakistan will benefit from improved decision-making, longer-term growth, and financial stability as a result of the importance of liquidity risk.