THE LINEAR EFFECT OF BANK LIQUIDITY ON PROFITABILITY IN SELECTED AFRICAN ECONOMIES

No Thumbnail Available

Date

2018

Journal Title

Journal ISSN

Volume Title

Publisher

FACULTY OF THE SOCIAL AND MANAGEMENT SCIENCES, OLABISI ONABANJO UNIVERSITY, AGO-IWOYE.

Abstract

Given the importance attached to sound liquidity management in the banking industry, this paper investigates the effect of bank liquidity on profitability. The study employs the bankruptcy cost and risk-return hypotheses to examine the linear effect of bank liquidity on bank profit. Annual bank-specific data from commercial banks in Kenya, Nigeria, and South Africa, for the period 2000-2014, are used in the study. The two-step system generalised method of moment's technique of analysis, an instrumental variable technique that addresses issues such as endogeneity, reverse causality and auto-correlation, is used for the investigation. The results revealed a statistically significant and positive relationship between liquidity and bank profit indicating the applicability of the bankruptcy hypothesis. This implies that banks in the study benefit from reduced financial distress and funding costs thereby increasing profits. The study thus recommends that commercial banks in the selected countries hold higher levels of liquidity to mitigate the risk of failure and increase profit. Keywords: bankruptcy

Description

Keywords

bankruptcy cost, endogeneity, liquidity risk, profitability

Citation

Collections