Abstract:

Liquidity is more important than profitability for the survival of an organization. Banking industry is the key financial institution in Pakistan having a substantial impact on the Gross Domestic Product of the country. This research investigates and analyzes the determinants of liquidity in private banks of Pakistan for the period 2004- 2015. Liquidity is impacted by micro as well as macroeconomic indicators. The study includes capital adequacy, size, operational efficiency, asset quality, and return on assets as micro economic indicators. Gross Domestic Product and Inflation are included as macroeconomic indicators.  Microeconomic data is collected from State Bank of Pakistan’s financial statement analysis report as well as published annual reports of private banks in Pakistan. Macroeconomic data is collected from World bank data. The study has analyzed the relationship through Pooled, Fixed and Random Effect Regression techniques. To assess the most reliable results f-test, Breusch Pagan and Hausman tests is used. The private banks in Pakistan conclude that capital adequacy, size, operational efficiency, asset quality and profitability have an insignificant impact on bank liquidity in pooled regression. However, inflation and gross domestic product have substantial influence on bank liquidity in all the regression models. The study will not only help banks in understanding the determinants of liquidity but will also help analyzing the relationship of liquidity with micro and macroeconomic variables.