Liquidity Profitability Relationship in Bangladesh Banking Industry

Abstract

This study explored the relationship between liquidity (measured as current ratio) and profitability (measured as return on assets) in the banking industry in Bangladesh. We have considered twelve banks in four different sectors (Government banks, Islami banks, multinational banks and private commercial banks). We tried to figure out how much liquidity of a bank can explain its profitability. We ran linear regression to find out the extent of relationship between bank’s liquidity and profitability (significance level was 10%). Individually all the sectors show no significant relationship between liquidity and profitability. Even the overall banking industry shows the same result. We considers year just before recession (2006) to post-recession (2011). We showed graphically how liquidity and profitability of these sectors varied over last couple of years. Government banks showed variable liquidity, while other sectors were steady. But, there were much fluctuations in profitability in between these times in all the sectors. Finally, we concluded that based on our sample and category, there is no significant relationship between liquidity and profitability in banks of different sectors in Bangladesh.