EFFECT OF LIQUIDITY MANAGEMENT ON PROFITABILITY OF COMMERCIAL BANKS IN RWANDA. Case study: Bank of Kigali Period: 2011-2022

Abstract

Many organizations rely on liquidity and profitability as crucial elements to determine their performance and survival. Profitability and liquidity should go hand in hand to ensure the long term survival and expansion of any business enterprise. Long-term investments outperform cash in terms of profitability. Financial managers' primary issue is whether to invest in more profitable long-term assets to limit liquidity or in less profitable short-term assets to reduce capital margins.. The general objective of this study was to assess the impact of liquidity management on financial performance of commercial banks. While specific objectives of the study were to establish the effect of advanced loans to deposit ratio on the profitability, to examine the effect of cash to deposit ratio on profitability and to analyze the effect of deposit assets ratio on the profitability of commercial banks in Rwanda. Secondary data were collected through annual financial reports and data were analyzed through E-views. Validity of research data were conducted and the data were normally distributed and free from multicollinearity whereby the calculated VIF were below 10. To establish the relationship between research variables, the econometrics were constructed and regression analysis were used. The regression results revealed that there is a significant positive relationship between Deposit to assets ratio and Return on Assets whereby the calculated coefficient is 0.6 and prob value is 0.053, this implies that an increase in deposit to assets by 1% will result in an increase of 6% in return on assets and vice versa. The research results also indicate a significant negative relationship between cash deposit to assets and return on assets where the calculated coefficient is -0.11 and prob value is 0.19, it implies also that an increase in cash to deposits by 1% will result in a decrease of 0.1% in return on assets and vice versa. Based on the results, there is long run relationship between liquidity management practices and the profitability of commercial banks in Rwanda. The higher the manager’s ability to raise deposits the more deposits and the more profit. From this perspective, bank should encourage voluntary deposits which will enables them to hinder liquidity constraints by analyzing their potential customers for special treatments and by raising their deposits rate to motivate customers to deposit more.