Assessment on the relationship between bank‟s liquidity and its profitability in Tanzania

Abstract

This study focused on determining the association between the bank‟s liquidity and performance of commercial banks in Tanzania and the association examined by different scholars in Tanzania and outside the country in different aspects but this study intended to put more light through ratio analysis between liquidity and profitability of the Tanzania commercial banks. These two components are the essential elements for commercial banks operate with the following specific objective; to determine the relationship between liquidity ratios ( LDR and LADR) with net interest margin which is a one profitability measures, to study the association between liquidity ratios (LDR and LADR) with return on asset, to study the relationship between liquidity ratios (LDRand LADR) with return on equity. The bank's liquidity ratios were treated as independent variables and the profitability ratios were treated as dependent variables, and data were analyzed through regression equation analysis.The study was conducted in Tanzania commercial banks whereby five commercial banks were taken as samples (NMB bank, CRDB bank, NBC bank, Exim bank Tanzania, and Barclays bank Tanzania) were taken into consideration for the time from 2012 to 2019. It was quantitative nature, longitudinal study whereby a researcher used non-probability sampling which was a purposive sampling method to select the sample of five banks from thirty-six (36) licensed commercial banks by Bank of Tanzania at the period of study. The studies used secondary data from the annual report of selected banks and were analyzed by the econometrics test and statistical software.All models revealed that there is weak relationship evidence between the bank‟s liquidity and its profitability, thus banks can concentrate on rising profitability without affecting its liquidity. Consequently, the banks can focus on raising their profitability without upsetting their liquidity, although this is not guaranteed because the situation might change. The researcher recommends that banks should be careful with their profitability, to create consistency in conducting business by proceeding to do a deep analysis of risk and loan portfolio mixture. Also, it is recommended that the banks should optimally utilize the deposits towards lending to customers, and this is because there are some few cases whereby the banks had very low loans to deposits ratio and other times extremely high loans to deposits ratio, which is not a good sign for the bank that wants to utilize optimally the deposits to be profitable and at the same time liquid. Generally, the study was conducted successfully although the research thinks that the results would be more robust if it was possible to include more banks in the sample and taking a long time frame, something that was not possible in this study