Examining the key determinants of Liquidity Risk in Pakistan’s Banking Sector: A Comprehensive Study

Abstract

The main aim of the empirical study was to examine the relation which exists between Liquidity risk and its determinants i.e.  CAR, Capital Adequacy Ratio, R.O.A. Return on Assets, R.O.E Return on Equity, Size of the bank, A.Q. Asset Quality and N.P.L. non-performing loan. The data was examined through the regression analysis. This study took 10 years data i.e., from 2013-2022 of ten (10) Pakistani Banks. The results of the regression analysis/study reveal that a negative relation exist between the Liquidity of bank and four determinants like C.A.P, R.O.E, Size of the bank and Asset Quality ratio whereas others two variables had positive impact i.e. N.P.L and R.O.A on liquidity of the bank. All variables jointly had a significant impact on Liquidity. Significant and negative relation was found between liquidity and Size of the bank, Asset Quality and capital adequacy ratio. Whereas return on assets has a positive and insignificant influence to the liquidity risk while NPL had the positive and the significant influence to liquidity and return on equity that have the negative and but insignificant effect as well on the liquidity of the bank. Consider the following guiding principles in the eventual framework of the bank supervision. Each supervisor must consider the liquidity mismatch between assets and liabilities is vital for assessing a bank's liquidity profile. This analysis helps identify potential liquidity risks beyond traditional financial ratios.