Liquidity

DETERMINANTS OF LIQUIDITY OF COMMERCIAL BANKS OF NEPAL
A Dissertation Submitted to the Office of the Dean, Faculty of Management in partial

fulfillment of the requirements for the Master’s Degree
By
Bijaya Upadhaya Poudel
Roll No.: 664/16
Registration No. 7-2-318-10-2012
Central Department of Management
November, 2021
ii
CERTIFICATE OF AUTHORSHIP
I herby corroborate that I have researched and submitted the final draft of dissertation
entitled “Determinants of Liquidity in Commercial Bank of Nepal”. The work of
this dissertation has not been submitted previously for the purpose of conferred of any
degree nor has it been proposed and presented as part of requirements for any other
economic purpose.
The assistance and cooperation that I have received during this research has been
acknowledged. In addition, I declare that all information source and literature used are
cited in the reference section of dissertation.
…..………………………
iii
Report of Research Committee
Mr. Bijaya Upadhaya Poudel has defended research proposal entitled “Determinants
of Liquidity in Commercial Bank of Nepal” successfully. The research committee
has registered the dissertation for the further progress. It is recommended to carry out
the work as per suggestions and guidance of supervisor Assistance Prof. Dr. Bal Ram
Duwal and submitted the thesis for evaluation and viva voce examination.
…..………………………
Dissertation Proposal Defended
Asst. Prof. Dr. Bal Ram Duwal
Supervisor Date: September 1, 2019
…..………………………
Dissertation Submitted
Asst. Prof. Dr. Bal Ram Duwal
Supervisor Date: November 15, 2021
…..………………………
Prof. Dr. Mahananda Chalice Dissertation Viva Voce
Chairperson, Research Committee Date: November 23, 2021
Date:
iv
APPROVAL SHEET
We have examined the dissertation entitled “Determinants of Liquidity in

Commercial Bank of Nepal” presented by Bijaya Upadhaya Poudel for the degree of
Master of Business Studies. We hereby certify that the dissertation is acceptable for
award of degree.
…..………………………
Assot. Prof. Dr. Bal Ram Duwal
Supervisor
…..………………………
Assot. Prof. Gyan Mani Adhikari
Internal Examiner
…..………………………
Assot. Prof. Dr. Manoj Kumar Chaudhary
External Examiner
…..……………………
Prof. Dr. Mahananda Chalice
Chairperson of Research Committee
…..……………………
Prof. Dr. Ramji Gautam
Head of Department
Date:-
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ACKNOWLEDGEMENT
I would like to offer my sincere gratitude to my supervisor Asst. Prof. Dr. Bal Ram
Duwal, Central Department of Management, Tribhuvan University, Kathmandu for
his constant encouragement, guidance and valuable supervision at my every stage of
my work. This study wouldn’t have materialized in the present form without his
inclusive observation and intellectual direction in the course of completion.
I am totally grateful to Prof. Dr. Ramji Gautam, Head of Department for his help and
support while preparing this thesis. I am thankful to staff of Central Department of
Management and other staffs of Tribhuvan University Central Library for their kind
cooperation during my library visit.
I would like to thank my friends for their valuable suggestion, continuous

encouragement and help through research.
…..…………………
Kirtipur, Kathmandu
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CONTENTS
Page No.
CERTIFICATE OF AUTHORSHIP ii
REPORT OF RESEARCH COMMITTEE iii
APPROVAL SHEET iv
ACKNOWLEDGEMENTS v
LIST OF TABLES ix
LIST OF ABBREVIATIONS x
ABSTRACT xi
CHAPTER-I: INTRODUCTIONS 1-5
1.1 Background of the study 1
1.2 Statement of the problems 3
1.3 Purpose of the study 4
1.4 Significance of the study 4
1.5 Limitations of the study 5
1.6 Organization of the study 5
CHAPTER-II: LITERATURE REVIEW 6-21
2.1 Theoretical Review 6
2.1.1 Conceptual review 6
2.1.1.1 Capital adequacy ratio and bank liquidity 6
2.1.1.2 Non-performing loans and bank liquidity 7
2.1.1.3 Bank size and bank liquidity 8
2.1.1.4 Deposit amount and bank liquidity 8
2.1.1.5 GDP and bank liquidity 9
2.1.1.6 The rate of inflation and liquidity 9
2.1.2 Empirical review 10

vii
2.3 Summery of literature review 14
2.4 Theoretical framework 17
2.4.1 Definitions of variables 18
2.5 Research gap 21
CHAPTER-III: RESEARCH METHODOLOGY 22-27
3.1 Research design 22
3.2 Population and sample 22
3.3 Sources of data and collection procedure 23
3.4 Data analysis procedure 24
3.5 Data analyzing tools 24
3.5.1 Financial ratios 24
3.5.2 Statistical tools 25
CHAPTER – IV: RESULT AND DISCUSSION 28-53
4.1 Descriptive analysis of variables 28
4.1.1 Analysis of bank’s specific variables 28
4.1.2 Descriptive analysis for the overall variables 38
4.2 Statistical Analysis 39
4.2.1 Correlation analysis 39
4.2.2 Regression analysis 43
4.2.2.1 Model summary 43
4.2.2.2 ANOVA 45
4.2.2.3 Regression coefficient 46
4.3 Major findings 49
4.4 Discussion 51
CHAPTER –V: SUMMERY AND CONCLUSION 54-58
5.1 Summary 54
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5.2 Conclusion 55
5.3 Implications 56
5.4 Areas of future research 57
References
Appendix
ix
LIST OF TABLES
Table No. Titles Page No.

4.1 Details of capital adequacy ratio 27
4.2 Analysis of capital adequacy ratio 28
4.3 Details of share of non-performing loan 29
4.4 Analysis of share of non-performing loan 30
4.5 Details of bank size 30
4.6 Analysis of bank size 31
4.7 Details of amount of deposit 32
4.8 Analysis of amount of deposit 33
4.9 Details of macro environment variables 34
4.10 Analysis of macro environment variables 34
4.11 Overall descriptive analysis 35
4.12 Pearson correlation between (liquid assets/total assets) and (liquid asset /
deposit + borrowing) and independent variables 37
4.13 Model summary liquid assets/total assets ( ) 39
4.14 Model summary liquid assets/ (borrowing+ deposit) ( ) 40
4.15 ANOVA test on liquid Asset by total assets 41
4.16 ANOVA test on liquid asset by deposit+ borrowing 41
4.17 Regression coefficient liquid asset /total asset and affecting factors 42
4.18 Regression coefficient liquid asset / deposit+ borrowing and affecting
factors 43
x
LIST OF ABBREVIATIONS
AD - Anna Domine
ADB/N - Agriculture Development Bank; Nepal
BS - Bikram Sambat
CAR - Capital Adequacy Ratio
CD Ratio - Credit Deposit Ratio
CSI - Cottage and Small Scale Industries
CV - Coefficient of Variation
G/N - Government of Nepal
GDP - Gross Domestic Product
i.e. - That is
IC - Indian Currency
IMF - International Monetary Fund
INF - Inflation
LC - Letter of Credit
NBL - Nepal Bank Limited
NC - Nepalese Currency
NIDC - Nepal Industrial Development Corporation
NPLs - Non-performing Loans
NRB - Nepal Rastra Bank
r - Correlation coefficient
RBB - Rastriya Banijya Bank
TA - Total Assets
BFIs - Bank and Financial Institutions
TU - Tribhuvan University
Viz. - Namely
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ABSTRACT
As liquidity problems of some banks during global financial crisis re-emphasized,

liquidity is very important for functioning of financial markets and the banking sector.
The aim of this study is therefore to identify determinants of liquidity of Nepali
commercial banks. The data cover the period from 2010 to 2020. In this study
liquidity is dependent variable and capital adequacy ratio (CAR), share of non-
performing loan (SoNPL), deposit amount, GDP and inflation are independent
variables. More specifically study have used two model for this study (liquidity/
total assets) and (liquidity/deposit + borrowing) model, as used by volvoda.
Accordance to model, the results of panel data regression analysis showed that
capital adequacy ratio (CAR), share of non-performing loan (SoNPL) and GDP have
significant but CAR and SoNPL only have positive impact to determine liquidity and
GDP have inverse relation. Bank size, deposit and inflation rate have insignificant but
only bank size and inflation rate have positive impact to determine liquidity level and
deposit amount have inverse relation. Accordance to model, the results of panel
data regression analysis showed that CAR, bank size, deposit amount and GDP have
significant relation in determining liquidity level. Among of them CAR and bank size
have positive relation with liquidity level but deposit amount and GDP have negative
relation. SoNPL and Inflation rate both have insignificant and positive relation with
liquidity level in the commercial bank of Nepal.
1
CHAPTER I
INTRODUCTION
1.1 Background of the study
Financial sector is the backbone of economy of a country. It works as a facilitator for

achieving sustained economic growth through providing efficient monetary
intermediation. A strong financial system promotes investment by financing
productive business opportunities, mobilizing savings, efficiently allocating resources
and makes easy the trade of goods and services. Several studies have reported that the
efficacy of a financial system to reduce information and transaction costs plays an
important role in determining the rate of savings, investment decisions, technological
innovations and hence the rate of economic growth. There are various factors that
positively or negatively affects to success of various organizations, so as to
commercial banks, among of them managing appropriate level of liquidity level have
core importance.
“Liquid asset means the cash balance of a bank or financial institution, the balance
remained in the current account, the balance maintained in Rastra Bank and such
assets of a bank or financial institution specified as liquid assets by the Rastra Bank
from time to time.” (Bank and Financial Institution Act, 2017).
Liquidity for a bank means the ability to meet its financial obligations as they come
due. Bank lending finances investments in relatively illiquid assets, but it funds its
loans with mostly short term liabilities. Thus one of the main challenges to a bank is
ensuring its own liquidity under all reasonable conditions. A bank's liquidity is
determined by its ability to meet all its anticipated expenses, such as funding loans or
making payments on debt, using only liquid assets. The attention has been paid by
lender to the last resort to overcome the liquidity crisis (Aspachs, et. Al. Nier, Tiesset,
2005).
Bank for International Settlements defines liquidity as the ability of bank to fund
increases in assets and meet obligations as they come due, without incurring
unacceptable losses. The management of any firm should be able to identify its
strength and weakness, likewise exploit opportunities and tackle threats as it is
determined to make profits.
2
Liquidity can be defined as the ability of a financial institution to meet all legitimate
demands for funds. A bank needs to hold liquid assets to meet the cash requirements
of its customers if the institution does not have the resources to satisfy its customers'
demand, then it either has to borrow on the inter-bank market or the central bank. If
bank unable to meet its customers' demands leaves itself exposed to a run and more
importantly, a systemic lack of confidence in the banking system (Yeager and Seitz,
1989).
Liquidity means allocation of funds in close relation to their respective

sources.Liquidity is the status and part of the assets which can be used to meet the
obligation inthe commercial banks. Liquidity can be viewed in terms of liquidity
stored in thebalance sheet and in terms of liquidity available through purchased
funds.Liquidity is the ability of a bank to pay cash to depositors on demand.It is
thearrangement and the allocation of funds in such a way that can be drawn
immediatelywithout any loss of principle.More specifically, the idle money does not
make any return. Therefore, the high liquidity may cause oflow profitability and
inefficient performance of the overall Banking sector. It maycause failure of banking
performance in long term ( Pandey, 2000).
As other organization higher profitability is ultimate aim of commercial banks. One

factor that affects profitability is qualitative management of liquidity. In the same way
there are various factors that affect level of liquidity. Based on the review of above
discussion and given definitions, liquidity is the ability of a financial institution to
meet all legitimate demands for funds which is the specific topic of study. It plays a
pivotal role in the successful operation in any business. In case of bank, it means
stored in thebalance sheet and in terms of liquidity available through purchased funds,
ability of a bank to pay cash to depositors on demand, amount of money that can
drawn in urgent need. While managing level of liquidity organization have to bear
risks namely funding and market liquidity risk. Organizations have to manage
liquidity level tactfully for achieving the goal.
3
1.2 Statement of the problems
One of the major investment of commercial banks is liquidity. On every investment

there should be considerable return to investors, so as to the commercial banks'
liquidity investment. Investment in liquidity cheap or expensive depends upon the
carefulness of liquidity management. Liquidity investment is always essential and
equally risky as well. If they know about the exact factors that influencing the
liquidity level, they will invest in liquidity confidently. It is unpredictable to specify
what factors determine the liquidity level. There should be consider the external and
internal factors before determining the level of investment in liquidity (pandey,
2000).
Banks and financial institutions should have to maintain balanced level of liquidity in
efficient and effective manner and policymakers can affect their effort in constructive
way. The management of bank and financial policy makers then needs to decide how
they can do best to maintain balanced level of liquidity in their respective area. Study
proposed that all managements of bank and policy makers should have to do close
evaluation to the relationship between liquidity and its independent variable which
may be inside the commercial banks or may be outside of the commercial banks. So
they can find significance and direction of relation that will certainly helpful for
proactive management of liquidity level and invest to the liquidity in beneficial way.
Vodova, (2011) explored the determinants of liquidity of commercial banks by using

the Czech republic’s commercial bank data controlled by independent variables of
capital adequacy, share of non-performing loans, interest rates on interbank
transaction, inflation rate, business cycle financial crisis and size of banks and explore
significance positive relation between bank liquidity and capital adequacy, share of
non-performing loans, interest rates on interbank loans transaction, negative influence
of inflation rate, business cycle and financial crisis on liquidity. According to the
findings, the relation between size of banks and their liquidity is ambiguous. In this
context, this study will try to identify the determinants of liquidity and find out the
degree of affection of those determinants and to know about liquidity behavior. More
specifically, this present study is carried out to answer the following research
question:
4
1. What are the determinants of liquidity in commercial banks of Nepal?

2. What is the relationship between bank specific variables and macro-
economic variables on liquidity of commercial banks in Nepal?
3. What are the effects of bank’s specific variables and macro-
economical variables on liquidity of commercial banks in Nepal?
1.3 Purpose of the study
This study aims to analyze determinants of liquidity of commercial banks and their
relationship with the liquidity based on information available in Nepalese context.
The objectives of this study will examine the impact of the determinants of the
liquidity of Nepalese commercial bank. The specific objectives of the study are listed
as below:
1. To assess the determinants of liquidity in commercial banks of Nepal.
2. To examine the relationship between bank’s specific variables and
macro-economic variables on liquidity of commercial banks of Nepal.
3. To examine the effect of bank’s specific variables and macro-
economical variables on liquidity of commercial banks in Nepal.
1.4 Significance of the study
The study deals with determinants of level of liquidity in commercial banks of Nepal.
The study also significance lies mainly in identifying and comparing the determinants
factors of liquidity. Banks can use recommendation of this study for proactive
management. It provides the real picture of ongoing condition which is beneficial to
potential as well as existing shareholders, about identifying risk return and make
decisions of utilizing funds. The study is also useful for depositors, merchant bankers
as well as other stakeholders; they can identify the overall performance and ongoing
liquidity risk of the banks. It will be helpful to those who want to conduct further
study in this field. Mainly, this study will be significance for the researchers, research
group and academicians for the future in the view of review.
5
1.5 Limitations of the study
The limitations of the study are:

1. The research only concentrates on determinants factors of level of
liquidity in commercial banks in Nepal.
2. Data only collected through secondary sources, does not include the
preference of different stakeholders.
3. The sample size and time period taken for the study is only covering
nine banks and eleven years.
4. The model used in this study and analysis is limited on some
quantitative methods.
5. This study only used IBM SPSS software analysis tools.
6. Result of this study may differ according to different state of nature
and time.
1.6 Organization of the study
The whole study is divided into five chapters and the chapters are organized
systematically as follows for the effective study.
Chapter I: This chapter consists of major issues to investigate along with the
objective, significance, focus and limitation of the study.
Chapter II: This chapter is related to theoretical analysis a brief review of related
literature. It tries to show overall scenario of determinants of liquidity level, its
determinants and their effect in financial performance, especially analysis of
commercial banks of Nepal.
Chapter III: This section describes the methodology employed in the study. This
chapter deals with the nature and sources of data selection for study areas, method of
analysis etc
Chapter IV: This chapter deals with the presentation and analysis of data and major
findings by using proper tools and techniques.
Chapter V: The last chapter incorporated summary, conclusion and recommendation

emanating from the study.
6
CHAPTER II
LITERATURE REVIEW
Review of literature has vital relevance with any research. Review of literature means
reviewing research studies of other relevant propositions in the related area of the
study so that all the past studies, their conclusions and deficiencies may be known and
further research can be conducted. Different authors like Moore, (2010), Chagwiza,
(2014), Rychtárik, (2009), Vodova, (2011) and Praet and Herzberg, (2008) provide
various liquidity ratios such as liquid assets to total assets, liquid assets to deposits,
liquidity assets to deposits plus borrowing, loans to total assets, loans to deposits,
loans to deposits & short term borrowings and total loan to total liabilities. To sum up,
we can employ various balance sheet items to identify liquidity trends and proactive
management of liquidity level.
Among the above liquidity ratios, Vodova, (2011) has used two ratios, namely liquid
assets to total assets (L1) and liquidity assets to deposits plus borrowing (L2), which is
the current practice of the Nepalese banks mentioned by regulatory body’s liquidity
requirement related directives. Therefore these ratios are using in this study as the
liquidity measures. In this chapter study have divided into two parts namely,
conceptual review and empirical review which are mentioning below:
2.1 Theoretical review
2.1.1 Conceptual review
2.1.1.1 Capital adequacy ratio and bank liquidity
The capital adequacy ratios (CARs) are a measures of the amount of a bank's core
capitals expressed as a percentage of its risk-weighted asset. Primary reason why
banks hold capital is to minimizing risks, including the risk of liquidity crunches,
protection against bank runs, and various other risks, most importantly credit risk.
Though the reason why banks hold capital is motivated by their risk transformational
role. Bank capital also do effect on banks’ ability to create liquidity. These theories
produce opposing predictions on the link between capital and liquidity creation. There
are mainly two types of capital adequacy ratio to level of liquidity “financial fragility-
7
crowding out” “Risk Absorption”. First one predicts that higher capital reduces
liquidity creation and vice versa predicts second one.
Focusing to the financial weakness, bank that raises funds from investors to provide
financing to an entrepreneur. The entrepreneur may withhold effort, which reduces
the amount of bank financing accessibility. More importantly, the bank may also
withhold effort, which limits the bank’s ability to raise financing. A deposit contract
mitigates the bank’s money holdup problem, because depositors might withdraw
money from bank if the bank threatens to withhold effort and therefore maximizes
liquidity creation. Providers of capital cannot run on the bank, which limits their
willingness to provide funds, and hence reduces liquidity creation. Thus, the higher a
bank’s capital ratio, the less liquidity it will create.. If deposit insurance were
complete, depositors have no incentive to run on the bank, and a deposit contract does
not mitigate the bank’s holdup problem. Moreover, there is negative effect of capital
on liquidity creation (Diamond, and Rajan, 2001).
2.1.1.2 Non-performing loans and bank liquidity
Non-performing loans (NPLs) are loans that a bank customer fails to meet his/her
contractual obligations in form of principal or interest payments exceeding 90 days.
Liquidity risk is the outcome of credit risk, which is the inability of borrowers to meet
their repayment obligation. NPLs are loans that give negative impact to banks in
developing the economy.
A definite fact, financial systems are responsible for managing complex and advance
financial transactions. The banking systems play the central role of mobilizing and
allocating resources in the market, savings and surplus funds channeled to deficit
units. Financial institutions oversee that operations are being run effectively and
efficiently. The financial term for this activity is known as “Risk Transformation”.
Granting loans generate most profits for banks. However, it involves high risk and
eventually the main contributor to non-performing loans (NPLs). A core substance for
sustained and rapid economic progress is financial stability. Financial stability
measures are to much being used, among various indicators of financial stability
include banks’ non-performing loan reflecting on its asset quality, credit risk and also
its efficiency in the allocation of resources to productive sectors. NPLs are the main
8
contributor to liquidity risk, which exposes banks to insufficient funds for operations
(Pandey, 2005).
2.1.1.3 Bank size and bank liquidity
According to the “too big to fail” argument, large banks would benefit from an
implicit guarantee, thus decrease their cost of funding and allows them to invest in
riskier assets. Therefore, “too big to fail” status of large banks could lead to moral
hazard behavior and excessive risk exposure. If big banks are seeing themselves as
“too big to fail”, their motivation to hold liquid assets is limited. In case of a liquidity
shortage, they rely on a liquidity assistance of lender of last resort. Thus, large banks
are likely to perform higher levels of liquidity creation that exposes them to losses
associated with having more illiquid assets to satisfy the liquidity demands of
customers. Hence, there would be positive relationship between bank size and
illiquidity (Iannotta, 2007). Since small banks are likely to be focused on traditional
intermediation activities and transformation activities they do have small amount of
liquidity. Hence, there would be negative relationship between bank size and
illiquidity (Rauch, 2008).
There are economies of scale in cash management. This would lead larger firms to
hold less cash than smaller firms. It is argued that the fees incurred in obtaining funds
through borrowing are uncorrelated with the size of the loan, indicating that such fees
are a fixed amount. Thus, raising funds is relatively more expensive to smaller firms
encouraging them to hold more cash than larger firms. Firms with more volatile cash
flows face a higher probability of experiencing cash shortages due to unexpected cash
flow deterioration. Thus, cash flow uncertainty should be positively related with cash
holdings (Miller and Orr, 1966).
2.1.1.4 Deposit amount and bank liquidity
A bank's liquidity is determined by its ability to meet all of its anticipated expenses,
such as funding new loans or fulfilling customer account withdrawals, using only
liquid assets. The anticipated expenses can only be an estimate of how much
customers may withdraw from savings or how many new mortgages may be issued
advantageously. Hence banks particularly have to err on the safe side, maintaining
9
liquidity at all times without fail. The bigger the cushion of liquid assets relative to
anticipated liabilities, the greater the bank's liquidity is and vice versa (Claire, 2021).
2.1.1.5 GDP and bank liquidity
According to the theory of bank liquidity and financial fragility, the relationship
between banks liquidity preference and the business cycle is fundamental to explain
the inherent instability of the capitalist system as a somehow increase by internal
growth. In periods of economic expansion, which are characterized by high degree of
confidence of the economic units about their profitability, there is a rise in the level of
investment. During this expansion, economic units decrease their liquidity preference,
preferring riskier capital assets with higher return. In this environment, economic
units are more likely to hold less liquid capital assets and to incur short-term debt with
higher interest rates. The loan able fund theory of interest states that the supply for
loan, illiquid assets for banks, increases when the economy is at boom or going out of
recession.
Banks’ liquidity during periods of economic downturn, when lending opportunities

may not be as good and they run down liquidity buffers during economic expansions
when lending opportunities may have picked up. Thus, it can be expected that higher
economic growth make banks run down their liquidity buffer and induce banks to
lend more (Aspachs, 2005).
2.1.1.6 The rate of inflation and liquidity
Inflation is the rate at which the value of a currency is falling and consequently the
general level of prices for goods and services is rising. In also common sense,
inflation reduces the real value of money, and thus makes the liquidity constraint
more binding. This problem can be resolved by having a financial intermediary which
channels the funds from entrepreneurs with excess liquidity to those lacking liquidity.
It means the more inflation rate the more level of liquidity is obvious. However, more
researchers emphasize the importance of access of information unequally in credit
markets stakeholder and demonstrate how increases in the rate of inflation adversely
affect credit market clash with negative reflection for financial sector, both bank and
equity market, performance and therefore long-run real activity. When we assumed
information factor constant increase in inflation rate cause the financial sector fewer
10
loans, resource allocation is less efficient, and intermediary activities tend to diminish
which cause adverse effects on capital/long term investment. In turn, the amount of
liquid or short term assets held by economic agents including banks will rise with the
rise in inflation (Huybens, 1998).
2.1.2. Empirical review
Bunda and Desquilbet (2008) investigated the determinants of liquidity risk of banks
from emerging economies for a sample of commercial banks in 36 emerging countries
between 1995 and 2000. Collected secondary data were analyzed with panel data
regression analysis method. It was found that there is positive and statistically
significant effect of capital adequacy, lending interest rate, inflation, GDP growth on
liquidity of banks. On the other hand, the presence of prudential regulation and
financial crises showed negative and significant impact on bank liquidity position.
However, the effect of bank size is insignificant.
Vodova (2011) studied the determinants of liquidity of commercial banks by using

the Czech republic’s commercial bank data over the period from 2001 to 2009. Study
used panel regression model taking liquidity as dependent variables and controlled by
independent variables of capital adequacy, share of non-performing loans, interest
rates on interbank transaction, inflation rate, business cycle financial crisis and size of
banks and explore significance positive relation between bank liquidity and capital
adequacy, share of non-performing loans, interest rates on interbank loans transaction,
negative influence of inflation rate, business cycle and financial crisis on liquidity.
Study found, the relation between size of banks and their liquidity is ambiguous.
Tseganes (2012) explored the impact of banks liquidity on financial performance

using the data from 2000 to 2011 using non-performing loans, bank size capital
adequacy ratio and loan growth rate as independent variables. Ordinary Least Squares
(OLS), Augmented Dicker-Fuller (ADF) unit root test and Pearson's correlation
analysis was adopted for the study. The study identified that non-performing loans are
highly negatively correlated with banks liquidity but bank size, capital adequacy ratio
and loan growth have the positive impact on banks’ liquidity.
Subedi and Neupane (2013) examined the impact of bank’s specific and macro
economical variables’ effects in their liquidity level in Nepalese commercial banks.
11
Study has covered the period from 2002/03 to 2011/12. The data for the study was
based on primary data collected by questionnaire method and quarterly publications
of banks as a secondary source. Data were analyzed through different statistical tools
such as descriptive statistics, correlation and multiple regressions with variance
inflation factor. The result of regression analysis showed that bank size had positive
and significant impact and inflation rate had positive and insignificant effect on
bank’s liquidity. Similarly, it showed that capital adequacy, bank size, share of non-
performing loans in the total volume of loans and liquidity premium paid by
borrowers had negative and statistically significant repress on banks liquidity. Growth
rate of gross domestic product, short term interest rate and inflation rate had negative
and statistically insignificant impact on banks liquidity. And, loan growth rate had
positive and statistically insignificant impact on banks liquidity capital.
Gautam (2014) investigated the determinants of banks liquidity and their impact on
financial performance with empirical study of commercial banks in Nepal of the
period of 2005 to 2014. Various specific and macroeconomic variables are taken into
consideration as the independent variables. Multiple regression models have been
used for the study. The result shows bank size, capital adequacy and inflation rate
had a positive impact on bank liquidity in contrary non-performing loans, profitability
and GDP growth rate had negative impact on bank liquidity. In significance concept
capital adequacy ratio, non-performing loan and profitability were significant but
bank size, GDP growth rate and inflation rate have insignificant with liquidity.
Moussa (2015) explored the factors which influence bank liquidity in Tunisian
context. Study covered the period of 2000 to 2010, sampled 18 commercial banks and
collected data through annual reports of bank. The methodology have been used for
the study were static panel and panel dynamic. Two measures of liquidity; liquid
assets /total assets and total loan/total deposits were estimated. It was found that
financial performance, capital/total assets, operating cost/total assets, growth rate of
GDP, inflation rate, delayed liquidity have significant impacts on bank liquidity while
size, total loan/total assets, financial cost/total credit, total deposit /total assets does
not have significant impact on bank liquidity.
Ojha (2016) investigated the impact of bank-specific and macroeconomic

determinants of liquidity of Nepalese commercial banks. The study used 5
12
commercial bank data of the period 2010/11 to 2015/16. Data were assessed mainly
by secondary sources, annual financial reports and economic survey reports. This
study has taken GDP, return on assets, return on equity, non-performing loans, capital
adequacy ratio and inter-bank rate as independent variables. Collected data were
analyzed by mean, standard deviation, correlation and the regression analysis. The
study reveals that there is significant influence on liquidity by GDP, return on assets,
return on equity, non-performing loans and Inter-bank rate.
Sheefeni & Nyambe (2016) studied the effects of macroeconomic determinants on

commercial banks' liquidity in Namibia. Study selected the period of 2005 to 2016.
This study took GDP, inflation rate and monetary policy as independent variables.
Collected data were analyzed using the unit root, bound test for co-integration and
error correction model. The finding of the study reveals that real gross domestic
product is the main determinant of commercial banks’ liquidity in Namibia. It was
also found that monetary policy rate is positively related to banks’ liquidity though
statistically insignificant. On the contrary, the results revealed a negative relationship
between inflation and commercial banks’ liquidity.
Bista (2018) examined the effects of bank’s specific and macroeconomic variables on
banks’ liquidity in the case of Nepal. Study took the period of 2005 to 2016. This
study has taken liquid asset /total asset and liquid asset/deposit and borrowing to
measure the liquidity of Nepal by selecting the bank specific and macro-economic
variables of Nepal. The multiple regressions model has adopted. The study concluded
that, in relation to financial performance measured by liquid assets/total assets; CAR,
real GDP and deposit have significant impact but inflation and bank size do have
insignificant impact. Bank size, real GDP, deposit and inflation have positive
coefficient, but CAR have negative coefficient. On the other hand, in determinants of
liquidity measured by liquidity /deposit+ borrowing; CAR, real GDP and deposit have
significant impact on the determining the liquidity but inflation and bank size had
insignificant impact. Bank size, real GDP, deposit and inflation have positive
correlation but CAR have negative correlation.
Khanal (2019) studied the effect of bank’s specific and macroeconomic variables on
banks’ liquidity and their impact on financial performance in case of Nepal. The study
took the sampling period of 2005/06 to 2015/16. This study has taken liquid asset
13
/total asset and liquid asset/deposit and borrowing to measure the liquidity of Nepal
by selecting the bank specific and macro-economic variables of Nepal. Multiple
regression model has used. The study concluded that ROA has positive significant
impact whereas ROE, Size and inflation have negative and significant impact on
liquidity. Similarly CAR and GDP has negative insignificant impact on loan to
deposit ratio whereas, NPL has positive insignificant impact. This study concludes
that ROA, ROE, bank size and inflation are major determinants of banks’ liquidity
14
2.3 Summery of literature review

Author Title Methodology Major Findings
Bista, (2018) Determinants of Banks The Regression Analysis deposit, capital adequacy, remittance and bank size are determinants of
Liquidity and their Impact on bank liquidity of the commercial bank out of which deposit is prevalent to
Financial Performance: increase bank liquidity and capital adequacy is key to decrease it
Empirical Study on Commercial
Banks in Nepal
Chagwiza, (2014) Zimbabwean Commercial The Regression Analysis The study revealed that there is a positive link between bank liquidity and
Banks Liquidity and Its capital adequacy, total assets, gross domestic product and bank rate, found
Determinants that the adoption of multi-currency, inflation rate and business cycle have a
negative impact on liquidity. It seems the banks size and their liquidity is
positively correlated.
Moussa, (2015) The Determinants of Bank The Regression Analysis Study found that financial performance, capital adequacy ratio operating
Liquidity: Case of Tunisia costs, growth rate of GDP, inflation rate, delayed liquidity have significant
impact on bank liquidity while bank size, total loans, financial costs, total
deposits does not have a significant impact on bank liquidity.
Ojha, (2016) Macroeconomics And Bank- The Regression Analysis The results reveal that there is significant influence on liquidity by GDP,
Specific Factors Affecting Return on assets, Return on equity, Non-performing loans, Capital
Liquidity: A Study Of Nepali adequacy ratio and Inter-bank rate
Commercial Banks
15
Khanal, (2019) Determinants of Banks The Regression Analysis Results revealed that ROA has positive significant impact whereas ROE,
Liquidity and Their Impact on size and inflation have negative significant impact on liquidity. Similarly
Financial Performance: CAR and GDP has negative insignificant impact on loan to deposit ratio
Empirical Study on Commercial whereas, NPL has positive insignificant impact. This study concludes that
Banks in Nepal ROA, ROE, bank size and inflation are major determinants of Bank
liquidity
Subedi&Neupane (2013) Determinants of Banks The Regression Analysis Study found capital adequacy and share of non-performing loans had a
'Liquidity and Their Impact on negative and statistically significant effect on the bank liquidity of the
Financial Performance in commercial banks whereas loan growth, GDP growth rate, liquidity
Nepalese Commercial Banks premium and short term interest rates had a negative and statistically
insignificant effect on the bank liquidly of the commercial bank. Similarly,
bank size had a positive and a statistically significant effect and the
inflation rate had a positive but insignificant effect on the bank liquidity
of the commercial banks.
Vodova, (2011) Liquidity of Czech Commercial The Regression Analysis Found positive link between bank liquidity and capital adequacy, share of
Banks and Its’ Determinants, non-performing loans and interest rates on loans and on interbank
transaction, negative influence of inflation rate, business cycle and
financial crisis on liquidity, the relation between size of banks and their
liquidity is ambiguous.
Gautam, (2014) Determinants of Banks The Regression Analysis It has found bank size, capital adequacy and inflation rate had a positive
Liquidity and Their Impact on impact on bank liquidity but non-performing loans, profitability and GDP
16
Financial Performance: growth rate had negative impact on bank liquidity of the commercial banks.
Empirical Study on Statistically, capital adequacy, non-performing loan and profitability were
Commercial Banks in Nepal significant but bank size, GDP growth rate and inflation rate were
insignificant. The study concluded capital adequacy, non-performing loan,
bank size, profitability, GDP growth rate and inflation rate as determinants
of bank liquidity of the commercial banks.
Sheefeni&Nyambe, (2016) Macro-economic Determinants Unit root, bound test for Results revealed that real gross domestic product is the main determinant of
of Commercial Banks' Liquidity co integration and error commercial banks’ liquidity in Namibia. It was also found that monetary
in Namibia correction model were policy rate is positively related to banks’ liquidity though statistically
employed insignificant. On the contrary, the results revealed a negative relationship
between inflation and commercial banks’ liquidity.
Tseganesh (2012 Determinants of Commercial Document survey Result stated that capital adequacy, bank size, share of nonperforming loans
Banks’ Liquidity in Ethiopia approach in the total volume of loans, interest rate margin, inflation rate and short
term interest rate had positive and statistically significant impact on banks
liquidity. Real GDP growth rate and loan growth had statistically
insignificant impact on banks liquidity.
From above literature review it can be concluded that in some study area researcher’s conclusions are contradictory based on researcher’s study
time and context especially on bank size and profitability effect on liquidity level of banks. Collectively, all researchers found positive relation
between bank liquidity and capital adequacy, share of non-performing loans and interest rates on loans and on interbank transaction and negative
relation with inflation rate, business cycle and financial crisis on liquidity level.
17
2.4 Theoretical framework
The conceptual framework is developed from the review of literature discussed above.
It shows the relationship between the independent variables such as bank specific and
macroeconomic and dependent variables such as bank liquid assets to total assets ratio
( ) and liquid assets to deposit plus borrowing ( ). Macroeconomic variables
consist of GDP and inflation whereas; a bank specific variable consists of capital
adequacy ratio, shares of non-performing loan, amount of deposit and bank size. The
following figure shows the dependent and independent variables.
Independent variables
Bank’s specific variables
- Capital adequacy ratio Bank’s liquidity

- Share of non-performing
-
loan -
- Bank size
- Deposit
Macro economic variables
- Inflation rate
- GDP
Ojha, P. (2016) Macroeconomics And Bank-Specific Factors Affecting Liquidity: A

Study Of Nepali Commercial Banks
18
2.4.1 Definitions of variables

S.N Name of variables Symbols Measurement
1 Liquidity/total assets Percentage
2 Liquidity/ deposit+ borrowing Percentage
3 Bank size TA
4 Capital adequacy ratio CAR Ratio
5 Share of non-performing loan SONPL Ratio
6 Deposit DEP RS.
7 Gross domestic product GDP RS.
8 Inflation INF Percentage
Independent variables:
Capital adequacy ratio
Capital adequacy shows the strength of bank capital against the vagaries of economic
and financial environment. Generally, the capital is positively related to the financial
performance of banks. The capital of bank is a common equity plus qualifying
cumulative perpetual preferred stock plus minority interest in equity account of
consolidated subsidiaries. Thus, it is a primary means of protection against the risk of
insolvency and failure. The financial fragility crowding out deposit hypothesis predict
negative relation whereas, risk absorption hypothesis suggests positive relationship
between capital adequacy and liquidity.
Share of non-performing loan
A non-performing loan is a loan that is default or close to be default. Many loans

become non-performing loan after being default for 90 days, but that can be depends
upon the contract term. The main causes of that is high interest rate, lower GDP, poor
appraisal system, inflation, unemployment and improper lending disbursement to
agriculture sector. It has negative impact of performance of any financial institutions.
Bank size
Bank size measures its general capacity to undertake its intermediary functions. Large
banks are likely to perform higher levels of liquidity creation that exposes them to
19
losses associated with having to sale illiquid assets to satisfy the liquidity demands of
customers. However, since small banks are likely to be focused on traditional
intermediation activities and transformation activities and vice versa to larger firms.
Hence small firms do have small amount of liquidity and larger company has higher
size of liquidity.
Deposit
A deposit is a sum of money which is in a bank account or savings account, especially

a sum which will be left there for some time. Bank deposits consist of money placed
into banking institutions for safekeeping. These deposits are made to deposit accounts
such as savings accounts, checking accounts and money market accounts. One of the
most prominent roles performed by banks is the creation of liquid claims on illiquid
assets. This is often done by offering demand-deposit contracts. Such contracts give
depositors options to withdraw their deposits when they need liquidity. Increase in
deposit by customers’ leads to increasing amount of money available to the bank
hence, basically there is proportionate relation between deposit and liquidity.
GDP
It is the largest quantitative measure of total economic activity. It is the sum total
value of goods and services that is produced within the boundary of country in the
specified periods of time. It is the monetary value of goods and service that is
produced within the national economy. It is one of the strong determinants of liquidity
because there are so many factors linked with GDP. Among of two types of GDP this
study has taken real GDP.
Inflation
Inflation is the sustainable increase in general price level that are the value of money
decrease. An increase in the rate of inflation drives down the real rate of return not
just on money, but on assets in general. The implied reduction in real returns
exacerbates credit market frictions. Since these market frictions lead to the rationing
of credit, credit rationing becomes more severe as inflation rises. As a result, the
financial sector makes fewer loans, resource allocation is less efficient, and
20
intermediary activity diminishes with adverse implications for capital/long term

investment.
Dependent variables:
Bank liquidity
The bank liquidity as a dependent variable consists of Liquid assets to total assets (L1)
and Liquidity assets to total deposits plus short term borrowing.
Liquid assets to total assets ratio ( )
Liquid assets to total assets ratio gives information about the general liquidity shock
absorption capacity of a bank. As the general rule, the higher the share of liquid assets
in total assets, the higher the capacity to absorb liquidity shock, given that market
liquidity is the same for all banks in the sample. Nevertheless, high value of this ratio
may be also interpreted as inefficiency. Since liquid assets yield lower income
liquidity bears high opportunity costs for the bank. Therefore, it is necessary to
optimize the relation between liquidity and profitability. According to the NRB
guidelines liquid assets of banks include cash on hand, deposit in other banks, and
short term government securities, money at call. This measure of liquidity was taken
as benchmark measure. = Liquid Assets / Total Assets
Liquid assets to deposit plus borrowing ratio ( )
This liquidity ratio identifies liquidity trend of bank. This ratio focuses on bank
sensitivity towards sudden withdrawal of deposits. If the ratio is greater than 1, the
bank is able to meet its obligation in terms of withdrawal of deposits Gitman, (2000).
It is more focused on the bank’s sensitivity to selected types of funding it has been
included deposits of households, enterprises and other financial institutions. The ratio
should therefore capture the bank’s vulnerability related to these funding sources.
= Liquid Assets / (Deposit + Borrowing).
21
2.5 Research gap
Research gap is the difference between previous work done and the present research
work. There has been lot of research works and studies undertaken to examine the
variables that affect to liquidity level with sampling various bank and financial
institutions. However, the purpose of study is quite different from the previous studies
in terms of the time it covers from 2009/10 to 2019/20. Samples are taken based on
stratified sampling methods considering firstly types of commercial bank and
secondly the bank size. It was found most of the researchers used convenience
sampling method. In this study micro environment variables, capital adequacy ratio,
share of non-performing loan, deposits amount and bank size, macro environment
variables, GDP and inflation rate, has taken. In this ground this study is different from
previous studies titled determinants of liquidity level in Nepalese commercial banks.
22
CHAPTER III
RESEARCH METHODOLOGY
This chapter puts lights on the research process and methods design to meet the stated
objectives of the study. The research methodology explores the research process
regarding the exploration the impact of particular macro and micro variables in
liquidity level of bank. The broad process of research methodology has been further
categorized for simplicity into various subtopics which are as follows:
3.1 Research design
Research methodology refers to the numerous process adopted by the researchers

during the research period. It is the techniques used during the research problem
solving in systematic manner. This includes many techniques and is crucial for every
research work.
The research design is specification of methods and procedures for acquiring the
needed information to solve the problem. Research methodology is the process of
assigning at solution of the problem through systematic way for dealing with data
inputs, data presentation and analysis, and research output. In this study descriptive
research design will use.
The study is based on two types of research design namely descriptive and analytical.
To describe the nature and behavior of variables, descriptive design is used. To
examine and analyze the relationships casual comparative research design has been
used. The method of this study is quantitative approach. A descriptive tools,
descriptive statistics, model summary and ANOVA are used. As a analytical tools,
correlation and regression are applied to analyze data collected from the annual
reports of the sample taken banks for identifying direction and significance level of
selected independent variables on determining liquidity level.
3.2 Population and sample
The total number of commercial bank represent as the total population for the purpose
of this study. Hence, the population consists of twenty-seven commercial banks. Out
of the total population nine banks are used as samples. Banks have been taken as a
23
sample based on stratified random sampling technique since it have limited

population and heterogeneous type, taking into consideration type and size of bank.
To do this research work eleven year’s annual reports have been taken of respective
banks which are published by the bank after audit to the general public and economic
survey reports. It covers the fiscal year of 2009/10 to 2019/20. Sample banks are as
follows:
1. Government bank
- Rastriya Banijya bank
2. Joint venture bank

- NABIL bank
-Everest bank
3. Private commercial bank

- Nepal Investment bank
- NIC ASIA bank
- NMB bank
- SANIMA bank
- Prime bank
- Siddhartha bank
3.3 Sources of data and data collection procedure
Without any data, nothing can be studied. So for any statistical investigation, the
collection of data of data is more important. The study is based on secondary data in
nature. Availability of data about various aspects of financial information and
macroeconomic variables are as follows:
Capital Adequacy Ratio -Annual reports

The share of non-performing loans -Annual reports
Bank size -Annual reports
Amount of deposit -Annual report
Gross domestic product -Economic survey report
Inflation rate -Economic survey report
24
In addition to these, different published articles, report, book, journal, and graduate
research project are also used.
3.4 Data analysis procedure
Analysis is an important part of the study under which data are presented and
analyzed in useful format. Here the collected data are classified, edited, and presented
in the appropriate tables for analysis and interpretation and made up-to-date. The
obtained secondary data are calculated using SPSS for desire results. In SPSS
software, used descriptive and analytical tools for achieving the objectives of the
study. Basically simple analytical statistical tools such as tabling, covariance and
regression are adopted in this study. Especially descriptive analysis method is used for
the study.
3.5 Data analyzing tools
This thesis work is based on financial as well as statistical analysis. Various tools and
techniques are applied for making the thesis work more presentable. Some important
statistical tools have been used to present and analysis the data for achieving the
objectives are as follows:
3.5.1 Financial ratios
Ratios are the most commonly used financial tools which will be used in this study as
well. These ratios help in simplifying the annual reports data into more understanding
view point which aid in predicting the future and knowing the present. The ratios are
used in this study are as bellow:
1. Liquid assets to total assets ratio ( ) Liquid assets to total assets ratio should give
us information about the general liquidity shock absorption capacity of a bank. As
a general rule, the higher the share of liquid assets in total assets, the higher the
capacity to absorb liquidity shock, given that market liquidity is the same for all
banks in the sample
= Liquid assets / total assets

25
2. Liquid assets to deposit plus borrowing ratio ( ) The liquidity ratio identifies
liquidity trend of bank. This ratio focuses on bank sensitivity towards sudden
withdrawal of deposits. If the ratio is greater than 1, the bank is able to meet its
obligation in terms of withdrawal of deposits. Lower value indicates a bank’s
increased sensitivity related to deposit withdrawals.
= Liquid assets / (deposit + borrowing)
3. Capital adequacy is one of the elements that indicate the measurement of financial
strength of a bank. It is the capital position of the bank which somewhat assure
depositors that they will be compensated if any failure occurs. The capital
adequacy ratio here is extracted from annual report which is calculated as the ratio
of regulatory capital (tier I + tier II) to total risk weighted assets.
4. Share of nonperforming loan is also the one independent variables using in this
study. It is the portion of loan and advance bank assumed to be default on the total
loan and advances. Share of non-performing loan is extracted from annual report of
particular commercial bank.
3.5.2 Statistical tools
1. Descriptive analysis:
To define characteristics between dependent and independent variables

descriptive statistics of the variables (both dependent and independent) were
calculated over the sample period. A descriptive statistics method helps the
researcher in picturing the existing situation and allows relevant information.
It is used to describe the characteristic of the variables. Descriptive statistics
transform raw data into the form that make it easy to understand and interpret.
The mean represents the average value of the variable while median reveals
the centre value of the data. Standard deviation is a measure of the dispersion
of a set of data from its mean. Maximum and minimum shows lowest and
highest values of the data. Small standard deviation shows data point is
inclined to be extremely close to mean while high value of standard deviation
shows data set is border out over a large range of value
26
2. Correlation coefficient analysis
Correlation coefficient is a relative measure of co-movements between

variables. It is the measurement of linear relationship between two or more
variables. It values lie between -1 to +1.
3. Regression analysis
The models employed in this study intend to analyze the relationship between
internal as well as macroeconomic determinants of liquidity. The following
regression model is used in this study in an attempt to examine the empirical
relationship between the bank’s specific and macroeconomic variables on
liquidity of Nepalese commercial bank. Therefore, the following model
equation is designed to test the hypothesis. From the conceptual framework
the function of dependent variables (i.e. Determinants) takes the following
form:
Determinants of liquidity = f (CAR, SONPL, TA, DEP, GDP, INF)
More specifically, the given model has been segmented into following models:
Model I
Model I tries to find out the determinants of liquidity
Model II
Model II tries to find out the determinants of liquidity
Where,
= Constant term
CAR = Capital Adequacy Ratio
TA = Bank size defined by the log of total assets
DEP = Deposit of bank on the year.
27
GDP = Gross Domestic Product

INF = Inflation
SONPL = Share of non-performing loan
= Liquidity/total assets.
= Liquidity/Deposit+ Borrowing
= Regression coefficients
= Error item
i = commercial bank
t = index of time period
4. ANOVA
Analysis of variance, or ANOVA, is strong statistical technique that is used to

show difference between two or more means or components through
significance tests. It is a collection of statistical models used to analyze the
differences among group means and their association. It also shows us a way
to make multiple comparisons of several population means.
28
CHAPTER IV
RESULTS AND DISCUSSION
This chapter is based on analysis and interpretation of data collected during the study
of bank specific and macroeconomic determinants of liquidity of commercial banks in
Nepal. The data for this study was obtained from published financial statements of the
selected commercial banks as sample, economic survey report conducted by national
bureau of statistics and Nepal Rastra Bank's supervision report. Data has been
analyzed with reference to the objectives of study as mentioned in the chapter earlier.
These secondary data were calculated by using SPSS software. In this section, the
first section deals with determinants of liquidity. Then, the descriptive statistics and
the correlation analysis are discussed. Finally, the results of the regression analysis are
discussed by supporting empirical evidence. Hence, the systematic and orderly
interpretations and analysis of findings is discussed in this chapter. Following table
shows description and analysis of variables. It contained the dependent and
independent variables, mentioned to explain their relationship.
4.1 Descriptive analysis of variables
The detailing and descriptive analysis of nine commercial banks, 2009/10 to 2019/20
of independent variables are as follows:
4.1.1 Analysis of bank’s specific variables
Table 4.1 Detail of capital adequacy ratio (CAR)

Fiscal year NIC ASIA NMB PRIME RBB SANIMA SIDDHARTHA NIBL NABIL Everest
2009/10 12.66 17.61 9.78 -29.46 15.56 10.01 8.5 8.77 8.39
2010/11 11.34 15.31 13.66 -22.28 27.54 9.05 8.77 8.83 8.46
2011/12 9.91 13.95 12.65 -9.77 19.82 8.18 9.34 9.3 9.61
2012/13 12.21 10.42 11.88 1.51 13.91 8.28 10.01 9.98 9.31
2013/14 11.84 9.91 11.53 4.46 11.52 8.39 9.52 9.68 9.35
2014/15 10.53 8.84 11.29 10.16 10.13 7.58 9.54 10.18 10.44
2015/16 10.69 9.34 10.76 9.31 10.69 8.78 13.05 10.51 10.34
2016/17 12.38 12.39 12.45 9.15 14.07 11.02 11.58 11.21 12.58
2017/18 8.66 14.78 11.43 9.98 11.14 10.99 11.58 11.81 12.65
2018/19 8.24 11.81 12.45 13.39 10.63 10.11 N/A 11.58 12.38
2019/20 8.12 12.8 10.78 12.68 10.37 9.26 N/A 10.69 11.92
Note: Financial reports

29
Table 4.1 shows the distribution of capital adequacy ratio (CAR) of selected
commercial bank of sampled 11 fiscal years. Maximum CAR of NIC ASIA bank is
12.69% citing in fiscal year 2015/16 and minimum CAR is 8.12 in fiscal year
2019/20.17.61% is maximum CAR of NMB and 8.84% is minimum CAR. RBB got
more fluctuation on CAR minimums of -29.46% to maximum of 13.39%. In fiscal
year 2010/11 SANIMA got 27.54% which is maximum CAR value of SANIMA bank
and 10.37% in fiscal year 2019/20 is minimum value. SIDDHARTH bank seems
more consistent in terms of CAR with having maximum value of 11.2% and
minimum value of 7.58% in fiscal year 2016/17 and 2014/15 respectively. Maximum
CAR of NIBL bank is 13.05% citing in fiscal year 2015/16 and minimum CAR is
8.5% in fiscal year 2009/10. In fiscal year 2017/18 NABIL got 11.81% which is
maximum CAR value of NABIL bank and 8.77% in fiscal year 2009/10 is minimum
value. And finally in fiscal year 2017/18 CAR is 12.68, is maximum and CAR of
8.39% in fiscal year 2009/10 is minimum value of Everest bank.
Table 4.2 Analysis of capital adequacy ratio

Banks Minimum Maximum Mean Std. Deviation
EVEREST 8.39 12.65 10.4936 1.63318
NABIL 8.77 11.81 10.2309 1.04371
NIBL 8.5 13.05 10.21 1.52229
NIC ASIA 8.12 12.66 10.5982 1.67517
NMB 8.84 17.61 12.4691 2.76211
PRIME 9.78 13.66 11.6964 1.07646
RBB -29.46 13.39 0.83 14.7907
SANIMA 10.13 27.54 14.12 5.331
SIDDHARTH 7.58 11.02 9.2409 1.15551
Note: SPSS result
Table 4.2 shows descriptive statistics- mean, maximum and minimum values and
standard deviation of each year’s capital adequacy ratio associated with selected
commercial banks for eleven-year period. The mean of capital adequacy ratio of EBL,
NABIL, NIBL, NICASIA, NMB, PRIME, RBB, SANIMA and SIDDARTHA are
percentage of10.49, 10.23, 10.21, 10.59, 12.46, 11.69, 0.83, 14.12and 9.24 with
respective standard deviation of 1.633, 1.431, 1.52, 1.675, 2.76, 1.07, 14.79, 5.331and
30
1.155 These values show that the highest average capital adequacy ratio contains in
NMB and lowest in RBB with percentage of 12.46 and 0.83 respectively. The
collected data relating to capital adequacy ratio of RBB bank is more deviate from it’s
mean value having higher standard deviation, concluding comparative higher risk for
investing and NABIL have lower with 1.0437 have lower risk for investment.
Table 4.3 Detail of share of non-performing loan (SoNPL)

Fiscal year EVEREST NABIL NIBL NIC ASIA NMB PRIME RBB SANIMA SIDDHARTHA
2009/10 0.16 1.48 0.67 0.72 0.7 0 9.81 0.08 0.53
2010/11 0.34 1.77 0.94 0.6 0.27 0.57 10.91 0.004 0.79
2011/12 0.84 2.33 3.32 0.73 2.45 0.76 7.27 0.479 1.52
2012/13 0.62 2.13 1.91 2.32 1.8 2.23 5.32 0.03 2.39
2013/14 0.2 2.23 1.77 2.33 0.55 2.43 4.75 0.017 2.75
2014/15 0.25 1.82 1.25 2.07 0.42 1.83 3.77 0.07 1.8
2015/16 0.38 1.14 0.88 0.76 1.81 1.23 4.25 0.019 1.47
2016/17 0.66 0.8 0.83 0.36 1.68 0.88 5.35 0.01 1.09
2017/18 0.97 0.55 1.36 0.06 0.88 0.85 6.38 0.03 1.3
2018/19 0.16 0.74 0.46 0.06 0.88 4.79 0.08 0.75
2019/20 0.22 0.97 N/A 0.75 1.63 1.23 4.08 0.45 1.38
Table 4.3 consists of the share of non-performing loan (SoNPL) of selected

commercial bank of sampled 11 fiscal years. Maximum SoNPL of Everest bank is
0.97 citing in fiscal year 2017/18 and minimum SoNPL is 0.16 in fiscal year 2018/19.
2.33 is maximum SoNPL of NABIL and 0.55 is minimum SoNPL. NIBL got SoNPL
minimums of 0.67 to maximum of 3.32. In fiscal year 2013/14 NIC ASIA bank got
2.33 which is maximum SoNPL value of NIC ASIA bank and 0.06 in fiscal year
2017/18 is minimum value. Maximum SoNPL of NMB bank is 2.41 citing in fiscal
year 2011/12 and minimum SoNPL is 0.06 correspondent to in fiscal year 20018/19.
In fiscal year 2017/18 I found only Prime bank with minimum value of SoNPL value
of 0.00 in fiscal year of 2009/10 and 2.43 is maximum SoNPL value of Prime bank in
fiscal year 2013/14. RBB got comparatively high values in terms of SoNPL value
with having maximum value of 10.91 and minimum value of 3.77 in fiscal year
2011/12 and 2014/15 respectively SANIMA bank got comparatively less in terms of
SoNPL value with having maximum value of 0.479 and minimum value of 0.01 in
fiscal year 2011/12 and 2016/17 respectively. And finally in fiscal year 2013/14
31
SoNPL is 2.75, is maximum and SoNPL of 0.53 in fiscal year 2009/10 is minimum
value.
Table 4.4 Analysis of share of non-performing loan

EVEREST 0.16 0.97 0.4364 0.2888
NABIL 0.55 2.33 1.45091 0.64409
NIBL 0.67 3.32 1.4367 0.82426
NIC ASIA 0.06 2.33 1.01455 0.81671
NMB 0.06 2.45 1.11364 0.78585
PRIME 0 2.43 1.17182 0.72949
RBB 3.77 10.91 6.0618 2.36586
SANIMA 0.004 0.479 0.11536 0.17487
SIDDHARTHA 0.53 2.75 1.43364 0.68025
Note: SPSS result
The table 4.4 shows descriptive statistics; mean, maximum and minimum values and
standard deviation of each year’s share of non-performing loan associated with
selected commercial banks for eleven-year period. The mean of share of
nonperforming loan of EBL, NABIL, NIBL, NICASIA, NMB, PRIME, RBB,
SANIMA and SIDDARTHA are percentage of 0.436, 1.45, 1.43, 1.014, 1.113,
1.1718, 6.06, 0.1153 and 1.4336 with respective standard deviation of 0.288, 0.644,
0.824, 0.816, 0.785, 0.7294, 2.36, 0.1747 and 0.680. These values show that the
highest average share of non-performing loan contains in RBB and lowest in
SANIMA with percentage of 6.061 and 0.1153 respectively. The mean value of share
of non-performing loan of RBB bank is more deviate from its’ mean value having
higher standard deviation.
32
Table 4.5 Detail about total asset (Rs.000)

2009/10 41382760 52151684 57305413 15543572 13226578 20218830 67910654 7238558 22802429
2010/11 46236212 58141437 58356827 17699569 15948192 22086102 74880374 9363380 24405872
2011/12 55813129 63193414 65756231 17871019 18494830 27157976 93905093 13722466 29579198
2012/13 65741150 73241260 73152154 45822344 25125984 32409183 101523505 21976539 33653855
2013/14 70445082 90292964 86173927 51500485 30211663 38030964 122557920 29376986 40277752
2014/15 99167293 118695997 104345436 60519399 41337463 45800892 139560806 40301197 50647295
2015/16 114018921 131347288 134516966 83573552 78864969 54408913 172058371 56128555 76124947
2016/17 116945280 144017861 155361353 103108261 93074422 77786847 179074721 69481703 91586102
2017/18 144811151 160978071 171893546 170943177 112391430 95043979 197332000 91821952 119869218
2018/19 170077533 N/A N/A 217702263 135470410 102255829 226410177 109064487 151401764
2019/20 185023189 N/A N/A 251852885 179423373 152182993 266390912 126310981 182468449

33
Table 4.5 consists of the total assets (bank size) of selected commercial bank of
sampled 11 fiscal years. Maximum total asset of Everest bank is RS.185023189 citing
in fiscal year 2019/20 and minimum total assets is Rs. 41382760 in fiscal year
2009/10. RS.160978071 is maximum total assets of NABIL and Rs. 52151684 is
minimum total assets. Similarly maximum total asset of NIBL is Rs. 171893546
citing in fiscal year 2017/18 and minimum total assets is Rs. 57305413 in fiscal year
2009/10. In fiscal year 2019/20 NIC ASIA bank got Rs. 251852885 which is
maximum total assets value of NIC ASIA bank and Rs. 15543572 in fiscal year
2009/10 is minimum value. The maximum total asset of NMB bank is Rs. 179423373
citing in fiscal year 2019/20 and minimum total assets is Rs. 13226578 correspondent
to in fiscal year 2009/10. In fiscal year 2009/10 I found Prime bank with minimum
value of total assets value of RS. 20218830 and Rs. 152182993 is maximum total
assets value of Prime bank in fiscal year 2019/20. RBB got comparatively high values
in terms of total assets value with having maximum value of Rs. 266390912 and
minimum value of Rs. 67910654 in fiscal year 2019/20 and 2009/10 respectively.
SANIMA bank got comparatively less in terms of total assets value with having
maximum value of Rs. 126310981 and minimum value of Rs. 7238558 in fiscal year
2019/20 and 2009/10 respectively. And finally in fiscal year 2019/20 total assets is
Rs.182468449 is maximum and total assets of Rs.22802429 and in fiscal year 2009/10
is minimum value.
Table 4.6 Analysis of bank size

EVEREST 17.54 19.04 18.3106 0.5214
NABIL 17.77 18.9 18.3339 0.42303
NIBL 17.86 18.96 18.3479 0.4221
NICASIA 16.56 19.34 17.9505 1.00387
NMB 16.4 19.01 17.665 0.93057
PRIME 16.82 18.84 17.7157 0.67043
RBB 18.03 19.4 18.7311 0.45319
SANIMA 15.79 18.65 17.3902 0.99621
SIDDHARTHA 16.94 19.02 17.8799 0.74603
Note: SPSS Result

34
Table 4.6 demonstrates descriptive statistics; mean, maximum and minimum values
and standard deviation of each year’s size of bank (log10total assets) associated with
selected commercial banks for eleven-year sample period. The mean of size of bank
of EBL, NABIL, NIBL, NICASIA, NMB, PRIME, RBB, SANIMA and
SIDDARTHA are Rs. of 18.31, 18.33, 18.34, 17.95, 17.66, 17.71, 18.73, 17.39 and
17.87 with respective standard deviation of 0.521, 0.423, 0.4221, 1.003, 0.93, 0.67,
0.453, 0.9962 and 0.746. These values show that the highest average bank size
contains in RBB and lowest in SANIMA with Rs. of 18.73 and 17.39 respectively.
The total asset of NICASIA bank is more deviate from it mean value having higher
standard deviation and NIBL have lower with 0.4221. Collectively having lower
standard deviation collected data assume to be more realistic.
35
Table 4.7 Detail of amount of deposit (RS000)

Fiscal year EVEREST NABIL NIBL NIC ASIA NMB PRIME RBB SANIMA SIDDH
2009/10 36932310 46410701 50094725 12480760 10110689 17883518 68625869 5760495 20197029
2010/11 41127914 49696113 50138122 13677364 12866221 18938902 73941297 6356737 21575653
2011/12 50006100 55023695 57010603 15351206 15982555 23990952 87782195 11178734 25948505
2012/13 57720464 63609808 62428845 39908774 22185626 28798028 91093908 17789329 28392822
2013/14 62108135 75360769 73831375 44984218 27087258 34045262 107269942 24873849 35414007
2014/15 83093789 103957095 90631486 53477184 36722917 41005754 124221662 34045316 44740731
2015/16 91638884 109288114 99353328 139578561 63452888 43745461 139259011 41664487 57772206
2016/17 94091892 117436362 118921049 79906602 72317666 59680088 146587041 56161055 71415816
2017/18 115611705 134810669 136585576 64606790 83970867 72635987 164210303 77849380 94579591
2018/19 129568152 N/A N/A 177374678 \96641516 77040074 189255335 89373729 114923367
2019/20 143545475 N/A N/A 201630384 131660368 119441613 230827711 107250202 139609497

36
Table 4.7 consists of the amount of deposit of selected commercial bank of sampled
11 fiscal years. Maximum amount of deposit of Everest bank is RS. 143545475 citing
in fiscal year 2019/20 and minimum amount of deposit is Rs. 36932310in fiscal year
2009/10. RS.134810669 is maximum amount deposit of NABIL and Rs. 46410701 is
minimum deposit amount. NIBL got minimum of Rs.50094725 to maximum of
Rs.136585576. In fiscal year 2019/20 NIC ASIA bank got Rs. 201630384 which is
maximum deposit amount value of NIC ASIA bank and Rs. 12480760 in fiscal year
2009/10 is minimum value. Maximum deposit amount of NMB bank is Rs.
131660368 citing in fiscal year 2019/20 and minimum deposit amount is Rs.
10110689 correspondent to in fiscal year 2009/10. In fiscal year 2009/10 I found
Prime bank with minimum value of deposit amount value of RS. 17883518 and Rs.
119441613 is maximum deposit amount value of Prime bank in fiscal year 2019/20.
RBB got comparatively high values in terms of deposit amount value with having
maximum value of Rs. 230827711 and minimum value of Rs. 68625869 in fiscal year
2019/20 and 2009/10 respectively SANIMA bank got comparatively less in terms of
deposit amount value with having maximum value of Rs. 107250202 and minimum
value of Rs. 5760495 in fiscal year 2019/20 and 2009/10 respectively. And finally in
fiscal year 2019/20 deposit amount is Rs. 139609497, is maximum and deposit
amount of Rs. 20197029 in fiscal year 2009/10 is minimum value in Siddhartha bank.
Table 4.8 Analysis of amount of deposit

EVEREST 17.42 18.78 18.1324 0.4627
NABIL 17.65 18.72 18.1748 0.40316
NIBL 17.73 18.73 18.1609 0.37315
NICASIA 16.34 19.12 17.7533 0.99735
NMB 16.13 18.7 17.4478 0.88329
PRIME 16.7 18.6 17.5323 0.61194
RBB 18.04 19.26 18.6088 0.39115
SANIMA 15.57 18.49 17.1714 1.03112
SIDDHARTHA 16.82 18.75 17.6887 0.68517
Note: SPSS results

37
Table 4.8 demonstrates descriptive statistics- mean, maximum and minimum values
and standard deviation of each year’s amount of deposit (log10total deposit)
associated with selected commercial banks for eleven-year sampled period. The mean
of amount of deposit of EBL, NABIL, NIBL, NICASIA, NMB, PRIME, RBB,
SANIMA and SIDDARTHA are Rs. of 18.13, 18.17, 18.16, 17.75, 17.44, 17.53,
18.60, 17.17 and 17.68 with respective standard deviation of 0.462, 0.403, 0.373,
0.997, 0.883, 0.611, 0.39, 1.031, and 0.685. These values show that the highest
average amount of deposit contains in RBB and lowest in SANIMA with Rs.18.60
and 17.17 respectively. The amount of deposit of SANIMA bank is more deviate from
it’s mean value having higher standard deviation and NIBL have lower with 0.373.
Collectively all sampled banks, having lower standard deviation collected data
assume to be more realistic going to lead.
Table 4.9 Detail of macro-economic variables

Fiscal year GDP(Millions) INF(%)
2009/10 1,192.80 9.6
2010/11 1,367 8.3
2011/12 1527.3 9.9
2012/13 1,695 9.1
2013/14 1964.5 9.1
2014/15 2130.1 7.2
2015/16 2,253.16 9.9
2016/17 2674.49 4.5
2017/18 3044.93 4.2
2018/19 3458.79 4.6
2019/20 3767.04 6.5
Note: Economics survey report by central bureau of statistic Nepal
Table 4.9 consists of detail about external economic environment viz, real GDP and
Inflation rate of sampled 11 fiscal years. Here maximum GDP value of Rs. 3767.04
citing in fiscal year 2019/20 and minimum GDP value is Rs. 1,192.80 in fiscal year
2009/10. Similarly maximum inflation rate 9.9% citing in fiscal year 2015/16 and
2011/12 and minimum inflation rate of4.2% in fiscal year 2017/18.
38
Table 4.10 Analysis of macro environment variables

Minimum Maximum Mean Std. Deviation
INF 4.2 9.9 7.5364 2.25977
GDP 4.4 5.12 4.7636 0.23619
Note: SPSS result
Table 4.10 demonstrates descriptive statistics; mean, maximum value, minimum value
and standard deviation of each year’s macroeconomic variables, namely nominal
GDP and Inflation rate of eleven year sampled periods. It clearly shows the average
GDP is Rs. 4.76 which ranges from Rs. 4.40 to Rs.5.12. The standard deviation is
0.236. The average inflation rate is 7.53% which ranges from 4.20% to 9.90% and
standard deviation is 2.25.
4.1.2 Descriptive analysis for the overall variables
Table 4.11 Overall descriptive analysis

Variables Minimum Maximum Mean Std. Deviation
CAR -29.46 27.54 9.95 6.42389
SoNPL 0 10.91 1.6 1.94515
Bank size 15.79 19.4 18.0233 0.8104
Deposit 15.57 19.26 17.839 0.80072
GDP 4.4 5.12 4.7499 0.22061
Inflation 4.2 9.9 7.62 2.16238
0.0764 0.4421 0.20872 0.07456
0.0793 0.5084 0.24803 0.08676
Note: SPSS result
Table 4.11 showing overall descriptive statistic-mean, maximum and minimum values
and standard deviation of , and various selected independent variables. The
mean value of L1 is 0.208 during the period 2009/10 to 2019/20.The standard
deviation of is 5.445% which show average variation from its mean value
calculated from ratio during the period. The minimum and maximum values are
0.0764 and 0.4421. The determinants of liquidity are measured by liquid assets/
(Short term deposit +borrowing) indicating by show that mean value is 0.248
39
which is slightly higher than mean value of with the maximum value of is
0.5084 and minimum value is 0.079.There is slightly higher dispersion of towards
its mean value among banks that is shown by standard deviation is 8.67%
On the one hand there are micro economic variables that cause to differentiate in
liquidity level of organizations. Here in table the capital adequacy ratio shows the
proportion of owner's equity to total risk weighted assets. The mean value of CAR is
9.95% which is higher than minimum requirement of 10% Nepal Rastra Bank's
directives 2016 and Basel II requirements. The standard deviation of the CAR is
6.42% which is moderate variation. The minimum and maximum values of CAR are -
29.46% and 27.54% respectively. Where minimum percentage of share of non-
performing minimum value is almost zero ranging to 10.91 percentage leading to 1.6
percentage of mean value which have standard deviation of 1.945.The bank size
signified by varies from a minimum value of 15.79to maximum value
of 19.40 leading to an average of 18.0233. The standard deviation of bank size is
0.810 from mean value. Likewise, the varies from minimum 15.57 to
maximum 19.26 leading to average of 17.83. The standard deviation is 0.8007.
On the other hand remaining independent variables were the macroeconomic

indicators. The mean value of was 4.749 indicating the average real GDP of
the country’s economy over the past 10 years. The maximum GDP of the economy
was 5.12 and the minimum was 4.40. The general inflation rate is 7.62 percent of the
country on average over the past ten years. The maximum inflation was.9.90%and the
minimum were 4.2%, leading to standard deviation of 2.16%. This indicates that the
rate of inflation is little dispersed over the periods under study. Here liquid assets to
total assets ratio ( ) and liquid assets to deposits and borrowing ratio ( ) are the
independent measures the liquidity.
4.2 Statistical analysis
4.2.1 Correlation analysis
Correlation is a statistical technique that can show whether and how strongly pairs of
variables which can numerically related continuous variables. An intelligence
40
correlation analysis can lead to greater understanding the data with measuring, degree
to which two or more variables are associated with or related to each other or not.
For correlation analysis we can measures four types of correlations namely Pearson,
Kendall rank, Spearman and Point-biserial correlation. Among of them the most
widely used bi-variant correlation statistics is the Pearson product-movement
coefficient, commonly called the Pearson correlation which was used in this study.
Correlation coefficient between two variables ranges from +1 (i.e. perfect positive
relationship) to -1 (i.e. perfect negative relationship). The size of absolute value
indicates the strength of relationship, where 0= no relationship and 1 indicated that
the value of one variable can be exactly determined by knowing the value of other.
Subsequently, the sample size is the key element to determine whether or not the
correlation coefficient is different from zero/statistically significant.
41
Table 4.12 Pearson correlation between (liquid assets/total assets) and (liquid assets/ deposit + borrowing) and independent variable
L1 L2 CAR SoNPL Bank size Dep GDP Inf
L1 Pearson Correlation 1
Sig. (2-tailed)
L2 Pearson Correlation .938** 1
Sig. (2-tailed) 0
CAR Pearson Correlation -.202* -0.071 1
Sig. (2-tailed) 0.036 0.494
**
SoNPL Pearson Correlation .295 0.164 -.746** 1
Sig. (2-tailed) 0.004 0.112 0
Banksize Pearson Correlation -0.068 0.014 -0.186 .222* 1
Sig. (2-tailed) 0.514 0.89 0.071 0.03
*
Deposit Pearson Correlation -0.044 -0.013 -..237 .271** .987** 1
Sig. (2-tailed) 0.67 0.9 0.021 0.008 0
** *
GDP Pearson Correlation -.350 -0.187 .216 -0.121 .789** .747** 1
Sig. (2-tailed) 0 0.07 0.036 0.241 0 0
** **
Inflation Pearson Correlation .330 0.161 -0.195 0.119 -.588 -.533** -.761** 1
Sig. (2-tailed) 0.001 0.12 0.058 0.249 0 0 0
Note: SPSS result

**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).
42
Table 4.12 demonstrates the Bivariate Pearson's correlation coefficient between level
of liquidity measures by and and variables affecting its’ liquidity level. It shows
that is positively correlated with share of non-performing loan and inflation rate
with value of 0.295 and 0.33 respectively, having medium degree of strength in
relationship. Here in both case significance level is less than 0.15 so, both correlation
is statistically significant. In contrast is negatively correlated with CAR, bank size,
deposit and GDP with the negative value of 0.202, 0.068, 0.044, indicating weaker
level of strength in relationship, 0.35 with GDP indicates medium level of strength of
relationship. Whereas have positive correlated with share of non-performing loan,
bank size and inflation rate with values of 0.164, 0.014 and 0.161 respectively,
indicating weaker level of strength in relationship, have negatively correlation
with, CAR, amount of deposit and GDP with the coefficient of 0.071, 0.013 and 0.187
respectively, indicating weaker level of strength in relationship.
According to as well as share of non-performing loan, inflation rate has positive

relationship with banks liquidity in Nepal with having positive sign of Pearson
correlation. This shows that increase in share of non-performing loan and inflation
rate leads to increase in liquidity and vice versa.
According to and showing CAR, amount of deposit and GDP has negative
relationship with bank liquidity in Nepal having negative Pearson correlation value.
This shows that change in CAR, amount of deposit and GDP cause to inverse change
in liquidity level of Nepalese commercial banks.
However, accordance to above table and shows contradictory results regarding

relationship between liquidity and bank size.
Accordance to above table and has statistically significant and positive linear
relationship with correlation of 0.938. It observes high degree of correlation between
dependent variables.
43
4.2.2 Regression analysis
Regression analysis is a statistical tool applied for the investigation of relationships

between variables. The purpose of regression analysis is to predict an outcome based
on historical data. So it can be said that various independent variables can be use for
predicting the behavior of dependent variable based on the behavior of few/more no.
of independent variables. There are various types of regression analysis among of
them linear regression is one of the most widely known modeling technique.
The regression of determinants of liquidity in Nepalese commercial bank has been

analyzed by and . During this analysis, model summary has been presented to
identify the explanation of independent variables on dependent variables and ANOVA
analysis is done to test the significance of the model and the joint effect of
independent variables on dependent variable.
Regression analysis is further carried to test the validity of tally with the result
obtained from correlation analysis, test hypothesis and to test multiple regression
models.
4.2.2.1 Model summary
The model summary gives the total variability in the dependent variable explained by
the model. This indicates the percentage of the variability in the dependent variable
explained by factors not included on the study. The regression model for L1 is
and L2 has also has its model stated,
Real gross domestic product (log10 of real GDP in millions rupees), bank size (log5 of
total assets in millions rupees inflation (INF in percentage) and deposit (log5 of
deposit) are independent variables and determinants of liquidity is measures by liquid
asset/total assets and liquid assets/ (deposit+ borrowing) are considered dependent
variables.
44
Table 4.13 Model summary liquid assets/total assets ( )

Model Summaryb
R R Square Adjusted R Square Std. Error of the
Estimate
.528a 0.279 0.229 0.065452
Note: SPSS result

a. Dependent variable: Liquid asset/total assets
b. Predictors: (Constant), inflation rate, share of non-performing loan, bank size,
capital adequacy ratio, GDP, deposit
Table 4.13 demonstrates the model summery. Here, multiple correlation coefficient
R= 0.528 indicates that there was a high degree positive correlation between CAR,
share of non-performing loan, bank size, GDP, deposit level and inflation liquidity
measured by . The value R-Square is 0.279, indicates that 27.9% of variations in
liquidity can explained by independent variables included in the model. However, the
remaining 72.1% variation in liquidity caused by others independent variables that are
not included in the model.
Table 4.14 Model summary liquid assets/ (borrowing+ deposit) ( )

Model Summaryb
Model R R Square Adjusted R Std. Error of the
Square Estimate
.518a .269 .219 .07669
Note: SPSS result

a. Dependent variable: liquid asset/ (deposit+ borrowing)
b. Predictors: (Constant), inflation, share of non-performing loan, bank size,
Table 4.14 demonstrates the model summery. Here, multiple correlation coefficient
R= .506 indicated that there is strong positive correlation between CAR, share of
non-performing loan ,bank size, GDP, deposit and inflation rate on liquidity measured
by in Nepali commercial banks. Also, the value R-Square is 0.256, indicates that
25.6% of variations in liquidity can explained by independent variables included in
45
the model. However, the remaining 74.4% variation in liquidity caused by others
independent variables that are not included in the model.
4.2.2.2 ANOVA
The study sought to establish analysis of variance (ANOVA) which was a collection
of statistical models used to analyze the differences among group means and their
association. The ANOVA statistical presentation was used to present the regression
model significance.
Table 4.15 ANOVA test on liquid asset by total assets

ANOVAa
Model Sum of Squares Df Mean Square F Sig.
Regression 0.146 6 0.024 5.662 .000b
Residual 0.377 88 0.004
Total 0.523 94
Note: SPSS result

a. Dependent variable: liquid asset/total assets
Table 4.15 consists of ANOVA. In the table significance value is 0.000 which is less
than alpha value 0.050. Therefore the model is a good predicator of the relationship
between the dependent and Independent Variables. As a result, the independent
variables CAR, share of non-performing loan, bank Size, GDP, inflation, deposit and
dependent variables liquidity measure by is significant in explaining the variance
between independent variables and dependent variables.
46
Table 4.16 ANOVA test on liquid asset by deposit+ borrowing

ANOVAa
Model Sum of Squares Df Mean Square F Sig.
Regression 0.19 6 0.03 5.385 .000b
Residual 0.518 88 0.006
Total 0.708 94
Note: SPSS result
a. Dependent variable: liquid asset /(deposit+ borrowing)
Table 4.16 shows the ANOVA. Here, the significance value is 0.000 which is less
than alpha value 0.050. Therefore the model is a good predicator of the relationship
between the dependent and independent variables. As a result, the independent
variables namely CAR, share of non-performing loan, bank Size, GDP, inflation,
deposit and dependent variables liquidity measured by is significant in explaining
the variance between independent variables and dependent variables.
4.2.2.3 Regression coefficient
The results are based on panel data of 9 Nepalese commercial banks with 99
observations for the period of 2008/09 to 2019/20 by using linear regression model.
The following panel regression models were estimated;
= Liquid assets/ total assets = Liquid assets /deposit+ borrowing, CAR=Capital

adequacy ratio, share of NPL=share of NPL, BS= Bank size, GDP= Real Gross
Domestic Product, INF= Inflation, DE= Deposit €= Error item, =Constant, i
=Commercial banks and t= index of time periods are parameters to be
estimated.
47
Table 4.17 Regression coefficient liquid asset /total asset and affecting factors
Coefficientsa
Model Unstandardized Standardized T Sig.
Coefficients Coefficients
B Std. Error Beta
(Constant) 0.339 0.26 1.304 0.196
CAR 0.003 0.002 0.232 1.609 0.1
SoNPL 0.01 0.005 0.258 1.851 0.068
Bank size 0.081 0.062 0.882 1.308 0.194
Deposit -0.03 0.06 -0.327 -0.511 0.61
GDP -0.238 0.071 -0.704 -3.36 0.001
Inflation 0.005 0.005 0.145 1.008 0.316
Note: SPSS result

a. Dependent variable: liquid asset/total assets
Table 4.17 demonstrates the result to identify whether the independent variables are
statistically significant taking significance level of 0.10 and direction of relation. Here
in table, value of ‘p’ of SONPL and GDP are less than significance level 0.10 with
value of 0.10, 0.068 and 0.01 respectively so they are statistically significant with
liquidity measured by , but bank size, deposit and inflation rate have higher ‘p’
value then significance level with values of 0.194, 0.610 and 0.318 so they are
statistically insignificant with liquidity measured by .
In the row of un-standardized coefficient the value of ‘B’ indicates positive or

negative changes in dependent variable cause of a unit change in independent
variables. Here, CAR had positive value of ‘B’ coefficient of 0.03 indicates positive
relation between CAR and liquidity level measured by and indicates1% change in
CAR will cause 0.03% change in liquidity level. The ‘B’ value of SONPL is positive
0.010 indicates a percentage change in SONPL will cause 0.010% change in liquidity
level and has a positive relation with liquidity. Same way ‘B’ value of bank size and
inflation rate have positive value of 0.081 and 0.05 which indicates increase in
amount of deposit by Rs. 1 and 1% will cause increase in liquidity level by Rs. 0.081
48
and 0.05% respectively. On the other hand ‘B’ values of amount of deposit and GDP
are -0.030 and -0.238 respectively. We can conclude that Rs. 1 change in deposit will
cause inverse change in liquidity by Rs. 0.030 and same way Rs 1 increase in amount
of GDP will cause decrease in liquidity level by Rs. 0.238 and vice versa.
Table 4.18 Regression coefficient for liquid asset/ deposit + borrowing and
affecting factors
Coefficientsa
Model Unstandardized Standardized T Sig.
Coefficients Coefficients
B Std. Error Beta
(Constant) 0.256 0.304 0.842 0.402
CAR 0.003 0.002 0.258 1.774 0.08
SoNPL 0.01 0.006 0.214 1.1523 0.131
Bank size 0.306 0.073 2.858 4.209 0
Deposit -0.24 0.07 -2.211 -3.434 0.001
GDP -0.283 0.083 -0.721 -3.417 0.001
Inflation 0.006 0.006 0.155 1.07 0.288
Note: SPSS result

a. Dependent variable: liquid asset/ (deposit+ borrowing)
Table 4.18 demonstrates the result to identify whether the independent variables are
statistically significant taking significance level of 0.10 and direction of relation. Here
in table, value of ‘p’ of CAR, bank size, deposit amount and GDP are less than
significance level 0.10 with value of 0.080, 0.000, 0.001 and 0.001 respectively so
they are statistically significant with liquidity measured by but SoNPL and
inflation rate have higher ‘p’ value then significance level with values of 0.131 and
0.288 so they are statistically insignificant with liquidity measured by .
In the row of un-standardized coefficient the value of ‘B’ indicates positive or

negative changes in dependent variable cause of a unit change in independent
variables. On the one hand, here CAR had positive value of ‘B’ coefficient of 0.003
49
indicates positive relation between CAR and liquidity level measured by and 1%
change in CAR will cause 0.003% proportionate change in liquidity level. The ‘B’
value of SONPL is positive 0.010 indicates a percentage change in SONPL will cause
0.010% proportionate change in liquidity level and has a positive relation with
liquidity. Same way ‘B’ value of bank size and inflation rate have positive value of
0.306 and 0.006 which indicates increase in amount of deposit by Rs. 1 and 1% will
cause increase in liquidity level by Rs. 0.306 and 0.006% respectively. On the other
hand ‘B’ values of amount of deposit and GDP are -0.240 and -0.283 respectively. It
can be said that Rs. 1 change in deposit will cause inverse change in liquidity by Rs.
0.240 and same way Rs 1 increase in amount of GDP will cause decrease in liquidity
level by Rs. 0.283 and vice versa.
4.3 Major findings
This study attempts to analyze the Determinants of liquidity of the commercial banks
in Nepal. More specifically, the study aims to examine the Relationship between of
bank specific and macroeconomic variables on selected commercial bank liquidity in
the case of Nepal of the period of 2009/10 to 2019/20. This study has taken liquid
asset /total asset and liquid asset/(deposit and borrowing) to measure the liquidity of
Nepal by selecting the bank specific variables stated, CAR, share of non-performing
loan, bank size, deposit and macro-economic variables, GDP and inflation. In this
study, the findings from descriptive statistics, correlation analysis, ANOVA test and
linear regression model assumption were presented as follows.
1. The descriptive result showed that the dependent variable, liquid assets
/total assets of sampled Nepalese commercial banks are found ranging
from 7.64 percent to 44.21 percent with an average of 20.87 percent.
Liquid Assets/Deposit+ Borrowing is found ranging from 7.93 percent
to 50.84 percent with an average of 24.80 percent. Hence, this showed
that standard deviation from mean of liquid assets/ deposit+ borrowing
is greater than that of Liquid Assets/Total Assets with 8.67 of versus
7.45 of .
2. Similarly, the independent variables, capital adequacy ratio is found
ranging from -29.46 percent to 27.54 percent with an average of 9.95
with SD of 6.423. The capital adequacy ratio has negative minimum
50
value (-29) due to loss in governments bank i.e. Rastriya Banijya Bank
Ltd. during the study period. Share of nonperforming loan is ranging
from almost 0 to 10.91 leading to mean 1.60 and SD of 1.945.
Similarly bank size is found ranging from 15.79 to 19.40 which have
average of 18.02 with SD of 0.8104. Also the amount of deposit is
found ranging from 15.57 to 19.26 which have average of 17.83 with
SD of 0.8007. Likewise, GDP is found ranging from 4.40 to 5.12
leading to an average of 4.7499 with SD of 0.2206 from mean.
Inflation is found ranging from 4.2 percent to 9.9 percent leading to an
average of 7.62 percent with SD of 2.162 percent from mean.
3. According to liquid assets/total assets as well as (liquid assets/ deposit
+ borrowing) share of non-performing loan and inflation rate has
positive relationship with banks liquidity in Nepal having positive sign
of Pearson correlation having. They have value of 0.295, 0.164, 0.330
and 0.161. This shows that increase in share of non-performing loan,
amount of deposit and inflation rate would lead to increase in liquidity
level and vice versa.
4. Similarly, according to liquid assets/total assets and liquid
assets/deposit+ borrowing capital adequacy ratio, bank size, and GDP
has negative relationship with bank liquidity in Nepal having negative
Pearson correlation containing the value of 0.202 and 0.071, 0.068 and
0.014 and finally 0.350 and 0.187 respectively. This shows that change
in capital adequacy ratio, amount of deposit and GDP will lead to
inverse change in liquidity level and vice versa. In case of bank size
those two models give contradictory results regarding direction of
changes in variable compared to liquidity measured by and .
5. The findings also revealed that the value of R square on liquid assets
/total assets is 0.279 which means that around 27.9 percent variation in
liquid assets/total assets is explained by the regression equation
involving independent variables; CAR, share of non-performing loan,
bank size, deposit, real GDP and inflation. The ANOVA test showed
F- value of 5.662 which is also significant at 10% level.
6. The findings also revealed that the value of R square on liquid assets
(deposit+ borrowing) is 0.269 which means that around 26.9 percent
51
variation in liquid assets /(deposit+ borrowing) is explained by the

regression equation involving independent variables CAR, share of
nonperforming loan, bank size, deposit, real GDP and inflation. The
ANOVA test showed F-value of 5.38which is also is significant at 10%
level of significance.
7. Similarly, the regression model on liquid assets/total assets and liquid
assets/ deposit + borrowing both revealed that the beta coefficient for
CAR, share of non-performing loan, bank size and inflation rate are
positive having value of 0.003 and 0.003, 0.01 and 0.01, 0.081 and
0.306 and finally 0.005 and 0.006 respectively. Similarly, for the
amount of deposit and GDP regression coefficients are negative having
negative value of 0.03 and 0.24 and finally 0.238 and 0.283 by L2
respectively. But in analyzing significance level resulted and ,
have some conflicting results. Accordance to model capital
adequacy ratio, share of non-performing loan and GDP are only
statistically significant with liquidity. But according to model other
than inflation rate, all of the independent variables are statistically
significant with liquidity.
4.4 Discussion
Bank needs capital in order to lend or they risk becoming insolvent. Lending creates
deposit, but not all deposit arise from lending bank need liquidity when deposit is
drawn or they risk running out of money therefore liquidity creation is the function of
commercial banks. Rational decision maker makes optimal level of liquidity so that
firm can generate enough cash requirement to meet firm’s needs and don’t make
money ideal. The aim of this study was to identify degree of effects in determining the
liquidity level of commercial banks in Nepal by selected independent variables and
prefer some recommendation to bank’s management and researcher. This study used
independent variables: capital adequacy ratio, share of non-performing loan, bank
size, deposit, GDP and inflation while the dependent variable is liquidity measured by
assets/total assets ( ) and liquid asset/deposit+ borrowing ( ). Study is carried out
on the selected 9 Nepalese commercial banks over the period of 2009/2010 to
52
2019/2020. The result of this study somehow in line and against the findings of the
literatures that have been reviewed which are discussed below.
Based on model
The result reveals that there is significant influence of CAR, SONPL and real GDP on
liquidity level measures by model. In case of significance and direction of relation,
Those findings, in case of CAR and SONPL, are consistent with the findings of
Vodova, (2010) and Ojha, (2016) in case of SONPL Subedi & Neupane, (2013) also.
But, lower the CAR higher would be the liquid assets by total assets, “financial
fragility-crowding out” theories, this result is inconsistent with these theories but
consistence with risk absorption strategies. The study also reveals that negative beta
coefficient for real GDP. This indicates that higher the real GDP lower would be the
liquid assets by total assets. This finding is consistent with the theory of bank liquidity
and financial fragility but oppose to loan able fund theory. This finding is consistent
in case of significance with finding of Aspachs, (2005) but just oppose resulted in
terms of direction of relation. The result reveals that there is positive and insignificant
influence of deposit amount, bank size and inflation rate on liquidity level. This
finding is inconsistent with the findings of Claire, (2021) and Bist, (2018) in terms of
deposit amount. The relation between bank size and liquidity level, accordance to this
study, accept the concept of “too big to fail” approach and consistent with the findings
of Khanal, (2019) and just oppose to finding of Tseganesh, (2012 and Berger and
Bouwman, (2009).
Based on model
The result reveals that there is significant influence of CAR, bank size deposit amount
and real GDP on liquidity level measures by model. In case of significance and
direction of relation, those findings, in case of CAR and bank size, are consistent with
the findings of Bist, (2018) but in terms of significance, bank size result is
inconsistence with Moussa, (2015). This study result is inconsistence in case of
SONPL, but consistence in terms of GDP and CAR with the result of Ojha, (2016).
But, lower the CAR higher would be the liquid assets by total assets, “financial
fragility-crowding out” theories, this result is inconsistent with this theory but
consistence with risk absorption strategies. This finding is consistent with the findings
53
of Claire, (2021) and Bist, (2018) in terms of deposit amount. Result of this study
rejected the concept of “too big to fail” approach and just in line to the finding of
Rauch, (2008) and Berger and Bouwman, (2009) in terms of relation between bank
size and liquidity level. In terms of relation between bank size and liquidity level,
result accepted the findings of Huybens, (1998) and Smith, (1999). The study also
reveals that negative beta coefficient for real GDP. This indicates that higher the real
GDP lower would be the liquid assets by total assets. This finding is consistent with
the theory of bank liquidity and financial fragility but oppose to loan able fund theory.
This finding is consistent in case of significance with finding of Aspachs, (2005) but
just oppose resulted in terms of direction of relation. The result reveals that there is
positive and insignificant influence of SONPL and inflation rate on liquidity level.
This finding is consistent with the findings of Joshi, (2016).
54
CHAPTER V
SUMMERY AND CONCLUSION
This chapter presents the brief summary of the entire study. In addition, the major
conclusions are discussed based on the findings of the study in separate section of this
chapter which is followed by some recommendations regarding the determinants of
liquidity commercial banks in Nepal. Finally, the chapter ends with the scope of the
future studies in the same field.
5.1 Summary
efficient and effective manner and policymakers can affect their effort in constructive
way. The management of bank and financial policy makers then needs to decide how
they can do best to maintain balanced level of liquidity without incurring substantial
losses. Study have proposed that all managements of bank and policy makers should
have to do close evaluation to the relationship between liquidity and its determinants
variable which may be inside of the commercial banks or may be outside of the
commercial banks. So they can find significance and direction of relation that will
certainly helpful for proactive management of liquidity level and invest to the
liquidity in beneficial way. This study have been done for the purpose of assess and
examine the significance and direction of relation with selected bank’s specific and
macro economics variables with liquidity of commercial banks of Nepal. For that
purpose nine commercial banks are taken in consideration of the period of 2008/09 to
2019/20. Liquidity of these banks has been analytically tested here to compare with
bank's other specific and macro-economic factors likes SoNPL, CAR, deposit amount,
bank size, GDP and inflation rate. Data were collected from mainly secondary sources
has been analyzed with the use of different financial, descriptive and statistical tools
namely, average, standard deviation, correlation coefficient, coefficient of variation,
correlation coefficient, ANOVA and regression analysis considering the limitation of
sample size, time frame, sources of data, analyzing tools etc.. More specifically
Statistical package for social science (SPSS) software is used to compute the data and
to get the required information and results. This study is considering the rationality to
proactive management of liquidity in commercial banks of Nepal.
55
The finding of the study shows that, in relation to liquidity measured by ; CAR,
SoNPL and GDP have significant impact on the determining the liquidity in Nepalese
commercial banks, but bank size, deposit and inflation rate has insignificant impact.
CAR, SoNPL, bank size and inflation rate have positive coefficient, but deposit and
GDP have negative coefficient. Similar significant positive result found by Vodova,
(2010) and Ojha, (2016) in case of CAR and SONPL. This studies’ result accepts the
theory of “bank liquidity and financial fragility” but oppose to “loan able fund theory”
in terms of GDP. Result based on bank size accept the concept of “too big to fail”
approach. Same as this study similar positive insignificant result was found by Bista,
(2018) in terms of inflation and bank size but result is against to the sayings of
Huybens, (1998) in case of inflation. The result is line with finding of Bunda &
Desquilbet, (2008) of CAR but oppose in terms of GDP and inflation. Findings
Khanal, (2019) is totally against of the finding of this study. On the other hand, in
determinants of liquidity measured by ; CAR, bank size, deposit amount and GDP
have significant impact on the determinants of liquidity Nepalese commercial banks,
but inflation and SoNPL have insignificant impact. CAR, SoNPL, bank size and
inflation rate have positive coefficient, but deposit and GDP have negative
coefficient. Similar significant positive result found by Vodova, (2010) and Ojha,
(2016), also line with “Risk Absorption” theory in direction of relation in case of
CAR. This studies’ result accepts the theory of bank liquidity and financial fragility
but oppose to loan able fund theory in terms of GDP. The result is line with finding of
Bunda & Desquilbet, (2008) of CAR but oppose in terms of GDP and inflation. Result
based on deposit amount accepts the concept by Claire, (2021). Same as this study,
similar positive relation with liquidity is stated by Iannotta, (2007) and “too big to
fail” theory in term of bank size. The result of study is in line with the finding of
Subedi and Neupane (2013) but just oppose to the finding of Gautam, (2014) in terms
of SoNPL.
5.2 Conclusions
The results of this study suggest that bank specific and macroeconomic variables have
an imperatively significant role on banks liquidity level in Nepal. The major
conclusions are mentioning below:
56
Conclusion based on model
Coefficient of CAR, SoNPL and GDP are significant but bank size, deposit and
inflation rate have insignificant.
Further CAR and SoNPL only have positive impact on liquidity and GDP have
inverse relation.
Conclusion based on model
CAR, bank size, deposit amount and GDP have significant relation in determining
liquidity level. Among of them CAR and bank size have positive relation with
liquidity level but deposit amount and GDP have negative relation.
SoNPL and Inflation rate both have insignificant and positive relation with liquidity
level in the commercial bank of Nepal.
5.3 Implications
The implications of this study will make some contribution to manager of commercial
banks, commercial bank regulator or policy maker and supports for future researchers
in this field. The implication would be different based on priority of management but
the result of this study could be helpful to maintain desirable liquidity level of BFIS.
The study of this paper suggest following recommendations to BFIS’s, Policy makers
and for further researchers.
5.3.1 Implication to the management of commercial bank
Based on model
This study reveals that among the selected independent variables CAR, SoNPL and
GDP have the significant relation with liquidity level of commercial banks of Nepal.
So, management of commercial bank has to consider these variables in order to
managing the liquidity level. Among these variables percentage increase in GDP has
negative impact on liquidity level of commercial banks of Nepal. The monetary
policy maker should need to implement suitable policy measures to ease liquidity
during fiscal year with high economic growth. On the same way, commercial banks
ought to invest in productive sectors. On the other hands, SoNPL have positive impact
57
on liquidity level of commercial banks of Nepal. Which means that bank should need
to decrease SoNPL to ease liquidity level, for that purpose banks need to introduce
new consumers oriented scheme of lending and borrowing, this is always desirable for
the sound health of bank also. Further sufficient CAR is desirable but for control
increasing liquidity level banks should keep investment in less risky assets.
Bank size, deposit and inflation rate seems no significant impact on liquidity level of
commercial banks of Nepal. So there is no need to consider Bank size, deposit and
inflation seriously while determining the liquidity level in commercial banks of
Nepal.
Based on model
This study reveals that among of the selected independent variables CAR, bank size,
deposit and GDP have the significant relation with liquidity level of commercial
banks of Nepal. So management of commercial bank have to take consider these
variables while managing the liquidity level. Among of the independent variables
having significant impact, GDP and deposit are found to having negative repressors to
liquidity level of commercial banks of Nepal. So management of commercial bank of
Nepal should have to increase investment in productive sector so GDP would be
increases. On the same way deposit amount should be increases for controlling
increasing liquidity level for that purpose banks need to introduce new consumer
oriented scheme of lending. On the other hand, among of the independent variables
having significant effect, CAR and bank size are positive repressors to the liquidity
level of commercial banks of Nepal. For management of commercial banks of Nepal,
it is essential to decrease in CAR and bank size, in turn increasing in liquidity level
and vice versa. Sufficient CAR is desirable but for control increasing liquidity level
banks should keep investment in less risky assets. Increase in total assets is normal
but for control increasing liquidity level banks should try to decrease in assets.
SoNPL and inflation rate seems to get insignificant relation with liquidity level of
commercial banks of Nepal, so SoNPL and Inflation rate wouldn’t be consider while
determining the liquidity level in commercial banks of Nepal.
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58
5.3.2 Implication for future researchers
The study reveals the relationship between liquidity level and limited independent
variables. Future researchers can be carried out the research using other specific and
macro economical variables. This study is limited to the analysis of secondary data.
Future researcher can be done using primary data with more samples which may
result different result. This study covered only commercial banks in Nepal. It didn’t
consider other financial institutions and other sector to provide broad based analysis.
Future researchers can conduct relation between liquidity and factors affects to the
liquidity of other financial institution of Nepal except commercial banks.
5.4 Areas for the further research
The recommended areas for future research are mentioned below:

 The future researchers could replicate the study but consider other
methods of analysis such as Hausman Test, VAR Model, Co-
integration analysis and observe if the results would be different.
 The liquidity of the bank also depends upon the impact of rules and
regulations of central bank, character of the bank, short term interest
effect, etc. which this study has not studied. Thus, further study can be
carried out with such factors through the primary data.
 Even though the study is carried out by taking sample of commercial
banks only. The further researches can include samples of development
bank and other financial institutions more number of observations to
obtain the various determinants of liquidity.
 The study was only limited to six variables that affect the liquidity
level in Nepalese commercial banks. Thus, more research could be
done to determine the factors like : management efficiency, credit risk,
real interest rate, interbank transaction etc that may affect liquidity
level.
Annex I
Bank’s wise Collection of data related to Capital Adequacy Ratio (CAR)
Fiscal year NIC ASIA NMB PRIME RBB SANIMA SIDDHARTHA NIBL NABIL Everest
2009/10 12.66 17.61 9.78 -29.46 15.56 10.01 8.5 8.77 8.39
2010/11 11.34 15.31 13.66 -22.28 27.54 9.05 8.77 8.83 8.46
2011/12 9.91 13.95 12.65 -9.77 19.82 8.18 9.34 9.3 9.61
2012/13 12.21 10.42 11.88 1.51 13.91 8.28 10.01 9.98 9.31
2013/14 11.84 9.91 11.53 4.46 11.52 8.39 9.52 9.68 9.35
2014/15 10.53 8.84 11.29 10.16 10.13 7.58 9.54 10.18 10.44
2015/16 10.69 9.34 10.76 9.31 10.69 8.78 13.05 10.51 10.34
2016/17 12.38 12.39 12.45 9.15 14.07 11.02 11.58 11.21 12.58
2017/18 8.66 14.78 11.43 9.98 11.14 10.99 11.58 11.81 12.65
2018/19 8.24 11.81 12.45 13.39 10.63 10.11 N/A 11.58 12.38
2019/20 8.12 12.8 10.78 12.68 10.37 9.26 N/A 10.69 11.92
Annex II
Bank’s wise Collection of data related to Bank’s size
(Rs. in Thousand)
2009/10 41382760 52151684 57305413 15543572 13226578 20218830 67910654 7238558 22802429
2010/11 46236212 58141437 58356827 17699569 15948192 22086102 74880374 9363380 24405872
2011/12 55813129 63193414 65756231 17871019 18494830 27157976 93905093 13722466 29579198
2012/13 65741150 73241260 73152154 45822344 25125984 32409183 101523505 21976539 33653855
2013/14 70445082 90292964 86173927 51500485 30211663 38030964 122557920 29376986 40277752
2014/15 99167293 118695997 104345436 60519399 41337463 45800892 139560806 40301197 50647295
2015/16 114018921 131347288 134516966 83573552 78864969 54408913 172058371 56128555 76124947
2016/17 116945280 144017861 155361353 103108261 93074422 77786847 179074721 69481703 91586102
2017/18 144811151 160978071 171893546 170943177 112391430 95043979 197332000 91821952 119869218
2018/19 170077533 N/A N/A 217702263 135470410 102255829 226410177 109064487 151401764
2019/20 185023189 N/A N/A 251852885 179423373 152182993 266390912 126310981 182468449
Annex III
Bank’s wise Collection of data related to Deposit
(Rs. in Thousands)
Fiscal year EVEREST NABIL NIBL NIC ASIA NMB PRIME RBB SANIMA SIDDH
2009/10 36932310 46410701 50094725 12480760 10110689 17883518 68625869 5760495 20197029
2010/11 41127914 49696113 50138122 13677364 12866221 18938902 73941297 6356737 21575653
2011/12 50006100 55023695 57010603 15351206 15982555 23990952 87782195 11178734 25948505
2012/13 57720464 63609808 62428845 39908774 22185626 28798028 91093908 17789329 28392822
2013/14 62108135 75360769 73831375 44984218 27087258 34045262 107269942 24873849 35414007
2014/15 83093789 103957095 90631486 53477184 36722917 41005754 124221662 34045316 44740731
2015/16 91638884 109288114 99353328 139578561 63452888 43745461 139259011 41664487 57772206
2016/17 94091892 117436362 118921049 79906602 72317666 59680088 146587041 56161055 71415816
2017/18 115611705 134810669 136585576 64606790 83970867 72635987 164210303 77849380 94579591
2018/19 129568152 N/A N/A 177374678 96641516 77040074 189255335 89373729 114923367
2019/20 143545475 N/A N/A 201630384 131660368 119441613 230827711 107250202 139609497
Annex IV
Bank’s wise Collection of data related to Share of Non-performing Loan
2009/10 0.16 1.48 0.67 0.72 0.7 0 9.81 0.08 0.53
2010/11 0.34 1.77 0.94 0.6 0.27 0.57 10.91 0.004 0.79
2011/12 0.84 2.33 3.32 0.73 2.45 0.76 7.27 0.479 1.52
2012/13 0.62 2.13 1.91 2.32 1.8 2.23 5.32 0.03 2.39
2013/14 0.2 2.23 1.77 2.33 0.55 2.43 4.75 0.017 2.75
2014/15 0.25 1.82 1.25 2.07 0.42 1.83 3.77 0.07 1.8
2015/16 0.38 1.14 0.88 0.76 1.81 1.23 4.25 0.019 1.47
2016/17 0.66 0.8 0.83 0.36 1.68 0.88 5.35 0.01 1.09
2017/18 0.97 0.55 1.36 0.06 0.88 0.85 6.38 0.03 1.3
2018/19 0.16 0.74 0.46 0.06 0.88 4.79 0.08 0.75
2019/20 0.22 0.97 N/A 0.75 1.63 1.23 4.08 0.45 1.38
Annex V
Collection of data related to macro economic variable
Fiscal year GDP(Millions) INF(%)
2009/10 1,192.80 9.6
2010/11 1,367 8.3
2011/12 1527.3 9.9
2012/13 1,695 9.1
2013/14 1964.5 9.1
2014/15 2130.1 7.2
2015/16 2,253.16 9.9
2016/17 2674.49 4.5
2017/18 3044.93 4.2
2018/19 3458.79 4.6
2019/20 3767.04 6.5
Annex VI
Calculation of and of Everest bank
Here:
Fiscal Bank Deposit+borrowing Liquidity(000)

years size(000)
2009/10 41382760 37336910 10564090 0.255278 0.2829396
2010/11 46236212 41609914 10868350 0.235061 0.2611962
2011/12 55813129 50006100 12337055 0.221042 0.246711
2012/13 65741150 58122824 19420882 0.295414 0.3341352
2013/14 70445082 62108135 22619702 0.321097 0.3641987
2014/15 99167293 83093789 42242635 0.425973 0.508373
2015/16 114018921 91638884 36473411 0.319889 0.3980124
2016/17 116945280 94091892 35960571 0.307499 0.3821857
2017/18 144811151 115611705 51233916 0.353798 0.4431551
2018/19 170077533 129568152 33098404 0.194608 0.2554517
2019/20 185023189 143545475 32744821 0.176977 0.2281146
Put the values in formula we get value of and
Annex VII
Calculation of and of NABIL bank
Here:

years size(000)
2009/10 52151684 46485601 10414282 0.199692 0.2240324
2010/11 58141437 51346712 11379016 0.195713 0.2216114
2011/12 63193414 55334775 9596852 0.151865 0.1734326
2012/13 73241260 63609808 12120798 0.165491 0.1905492
2013/14 90292964 75360769 19397681 0.21483 0.2573976
2014/15 118695997 103957095 26908300 0.226699 0.2588404
2015/16 131347288 109288114 38110758 0.290153 0.3487182
2016/17 144017861 117436362 40675096 0.282431 0.3463586
2017/18 160978071 134810669 27192866 0.168923 0.2017115
2018/19 N/A N/A N/A - -
2019/20 N/A N/A N/A - -
Annex VIII
Calculation of and of NIBL
Here:
Fiscal years Bank size(000) Deposit(000) Liquidity(000)

2009/10 57,305,413 50094725 10727738 0.1872029 0.214149
2010/11 58356827 50,138,122 11854970 0.2031462 0.236446
2011/12 65756231 57010603 17292072 0.2629724 0.303313
2012/13 73152154 62428845 18618451 0.2545168 0.298235
2013/14 86173927 73831375 20588511 0.2389181 0.278859
2014/15 104345436 90631486 23378130 0.2240455 0.257947
2015/16 134516966 99353328 30858976 0.2294058 0.310598
2016/17 155361353 118921049 35535061 0.2287252 0.298812
2017/18 171893546 136585576 33225142 0.1932891 0.243255
2018/19 N/A N/A N/A - -
2019/20 N/A N/A N/A - -
Annex IX
Calculation of and of NIC ASIA bank
Here:

years size(000)
2009/10 15543572 13357200 2631606 0.169305 0.1970178
2010/11 17699569 14667364 4062645 0.229534 0.2769854
2011/12 17871019 15351206 2665942 0.149177 0.1736634
2012/13 45822344 40112791 8857318 0.193297 0.2208103
2013/14 51500485 44984218 10958212 0.212779 0.2436013
2014/15 60519399 53477184 10092140 0.166759 0.1887186
2015/16 83573552 139578561 11068571 0.132441 0.0792999
2016/17 103108261 79906602 17227237 0.167079 0.2155922
2017/18 170943177 64606790 26420461 0.154557 0.4089425
2018/19 217702263 177374678 24307148 0.111653 0.1370384
2019/20 251852885 201630384 36696405 0.145706 0.1819984
Annex X
Calculation of and of NMB bank
Here:

years size(000)
2009/10 13226578 10490944 3149889 0.238148 0.3002484
2010/11 15948192 13363421 2616360 0.164054 0.1957852
2011/12 18494830 15982555 4724549 0.255452 0.2956066
2012/13 25125984 22185626 6315774 0.251364 0.2846786
2013/14 30211663 27087258 5961640 0.197329 0.2200902
2014/15 41337463 37160917 9880368 0.239017 0.2658806
2015/16 78864969 63563582 13477559 0.170894 0.2120327
2016/17 93074422 72373013 16651912 0.17891 0.2300845
2017/18 112391430 83970867 13114721 0.116688 0.1561818
2018/19 135470410 96641516 21098504 0.155743 0.2183172
2019/20 179423373 131660368 29655456 0.165282 0.2252421
Annex XI
Calculation of and of Prime bank
Here:

years size(000)
2009/10 20218830 18332318 5191016 0.256742 0.283162
2010/11 22086102 19152022 4199604 0.190147 0.2192773
2011/12 27157976 24013002 7457120 0.274583 0.3105451
2012/13 32409183 29018376 9525577 0.293916 0.3282602
2013/14 38030964 34045262 9395769 0.247056 0.2759788
2014/15 45800892 41005754 10891266 0.237796 0.2656034
2015/16 54408913 43745461 9983870 0.183497 0.2282264
2016/17 77786847 59680088 14590922 0.187576 0.2444856
2017/18 95043979 72635987 16065345 0.169031 0.2211761
2018/19 102255829 77040074 14231473 0.139175 0.1847282
2019/20 152182993 119441613 21356232 0.140333 0.1788006
Put the values in formula and we get value of L1 and L2
Annex XII
Calculation of L1 and L2 of RBB bank
Here:
Fiscal Bank Deposit+borrowing Liquidity(000) L1 L2

years size(000)
2009/10 67910654 72665660 17045557 0.251 0.2345751
2010/11 74880374 78754099 16392410 0.218915 0.2081468
2011/12 93905093 90705321 38168238 0.406455 0.4207938
2012/13 101523505 93261083 41713837 0.410879 0.4472802
2013/14 122557920 109048542 54177200 0.442054 0.4968173
2014/15 139560806 125527000 37200122 0.266551 0.2963516
2015/16 172058371 139666721 58470236 0.339828 0.4186411
2016/17 179074721 146750917 47333523 0.264323 0.3225433
2017/18 197332000 164381799 47549595 0.240962 0.2892631
2018/19 226410177 189316022 20928465 0.092436 0.1105478
2019/20 266390912 266450976 25047665 0.094026 0.0940048
Annex XIII
Calculation of L1 and L2 of SANIMA bank
Here:
Fiscal Bank Deposit+borrowing Liquidity(000) L1 L2

years size(000)
2009/10 7238558 6205295 1568284 0.216657 0.2527332
2010/11 9363380 7014737 2189169 0.233801 0.3120814
2011/12 13722466 11266984 3283627 0.239288 0.291438
2012/13 21976539 19269455 5405406 0.245963 0.2805168
2013/14 29376986 25772117 5312510 0.180839 0.206134
2014/15 40301197 35732501 4147555 0.102914 0.1160723
2015/16 56128555 41664487 6654982 0.118567 0.1597279
2016/17 69481703 56161055 9196023 0.132352 0.1637438
2017/18 91821952 77849380 10787308 0.117481 0.1385664
2018/19 109064487 89373729 8330383 0.07638 0.0932084
2019/20 126310981 107250202 13383289 0.105955 0.1247857
Annex XIV
Calculation of L1 and L2 of SIDDARTHA bank
Here:
Fiscal years Bank Deposit+borrowing Liquidity(000) L1 L2

size(000)
2009/10 22802429 20542029 4116024 0.180508 0.2003709
2010/11 24405872 21620653 3862808 0.158274 0.1786629
2011/12 29579198 25993505 5448281 0.184193 0.2096016
2012/13 33653855 29180287 7157035 0.212666 0.2452695
2013/14 40277752 35520422 8407045 0.208727 0.236682
2014/15 50647295 44805731 7141195 0.140999 0.1593813
2015/16 76124947 57772206 7986134 0.104908 0.1382349
2016/17 91586102 71415816 11119535 0.121411 0.1557013
2017/18 119869218 94579591 12519271 0.104441 0.1323676
2018/19 151401764 114923367 22548909 0.148934 0.1962082
2019/20 182468449 139609497 28507050 0.15623 0.2041913
DETERMINANTS OF LIQUIDITY OF COMMERCIAL BANKS OF NEPAL
A Thesis Proposal Submitted to the Office of the Dean, Faculty of Management in partial
fulfillment of the requirements for the Master’s Degree
By
Roll No.: 664/16
Registration No. 7-2-318-10-2012
November, 2021
1
CHAPTER I
Introduction
1.1 Background of the Study
Financial sector is the backbone of economy of a country. It works as a facilitator for

achieving sustained economic growth through providing efficient monetary intermediation. A
strong financial system promotes investment by financing productive business opportunities,
mobilizing savings, efficiently allocating resources and makes easy the trade of goods and
services. Several studies have reported that the efficacy of a financial system to reduce
information and transaction costs plays an important role in determining the rate of savings,
investment decisions, technological innovations and hence the rate of economic growth.
There are various factors that positively or negatively affects to success of various
organizations, so as to commercial banks, among of them managing appropriate level of
liquidity level have core importance.
“Liquid asset means the cash balance of a bank or financial institution, the balance remained
in the current account, the balance maintained in Rastra Bank and such assets of a bank or
financial institution specified as liquid assets by the Rastra Bank from time to time.” (Bank
and Financial Institution Act, 2017).
Liquidity for a bank means the ability to meet its financial obligations as they come due.
Bank lending finances investments in relatively illiquid assets, but it funds its loans with
mostly short term liabilities. Thus one of the main challenges to a bank is ensuring its own
liquidity under all reasonable conditions. A bank's liquidity is determined by its ability to
meet all its anticipated expenses, such as funding loans or making payments on debt, using
only liquid assets. The attention has been paid by lender to the last resort to overcome the
liquidity crisis (Aspachs, et. Al. Nier, Tiesset, 2005).
Bank for International Settlements defines liquidity as the ability of bank to fund increases in
assets and meet obligations as they come due, without incurring unacceptable losses. The
management of any firm should be able to identify its strength and weakness, likewise exploit
opportunities and tackle threats as it is determined to make profits.
Liquidity can be defined as the ability of a financial institution to meet all legitimate demands
for funds. A bank needs to hold liquid assets to meet the cash requirements of its customers if
2
the institution does not have the resources to satisfy its customers' demand, then it either has
to borrow on the inter-bank market or the central bank. If bank unable to meet its customers'
demands leaves itself exposed to a run and more importantly, a systemic lack of confidence
in the banking system (Yeager and Seitz, 1989).
Liquidity means allocation of funds in close relation to their respective sources.Liquidity is

the status and part of the assets which can be used to meet the obligation inthe commercial
banks. Liquidity can be viewed in terms of liquidity stored in thebalance sheet and in terms of
liquidity available through purchased funds.Liquidity is the ability of a bank to pay cash to
depositors on demand.It is thearrangement and the allocation of funds in such a way that can
be drawn immediatelywithout any loss of principle.More specifically, the idle money does
not make any return. Therefore, the high liquidity may cause oflow profitability and
inefficient performance of the overall Banking sector. It maycause failure of banking
performance in long term ( Pandey, 2000).
As other organization higher profitability is ultimate aim of commercial banks. One factor
that affect profitability is qualitative management of liquidity. In the same way there are
various factors that affect level of liquidity. Based on the review of above discussion and
given definitions, liquidity is the ability of a financial institution to meet all legitimate
demands for funds which is the specific topic of study. It plays a pivotal role in the successful
operation in any business. In case of bank, it means stored in thebalance sheet and in terms of
liquidity available through purchased funds, ability of a bank to pay cash to depositors on
demand, amount of money that can drawn in urgent need. While managing level of liquidity
organization have to bear risks namely funding and market liquidity risk. Organizations have
to manage liquidity level tactfully for achieving the goal.
1.2 Statement of the Problems
One of the major investment of commercial banks is liquidity. On every investment there
should be considerable return to investors, so as to the commercial banks' liquidity
investment. Investment in liquidity cheap or expensive depends upon the carefulness of
liquidity management. Liquidity investment is always essential and equally risky as well. If
they know about the exact factors that influencing the liquidity level, they will invest in
liquidity confidently. It is unpredictable to specify what factors determine the liquidity level.
There should be consider the external and internal factors before determining the level of
investment in liquidity (pandey, 2000).
3
efficient and effective manner and policymakers can affect their effort in constructive way.
The management of bank and financial policy makers then needs to decide how they can do
best to maintain balanced level of liquidity in their respective area. I propose that all
managements of bank and policy makers should have to do close evaluation to the
relationship between liquidity and its independent variable which may be inside the
commercial banks or may be outside of the commercial banks. So they can find significance
and direction of relation that will certainly helpful for proactive management of liquidity
level and invest to the liquidity in beneficial way.
Vodova, (2011) aimed to identified the determinants of liquidity of commercial banks by

using the Czech republic’s Commercial Bank data controlled by independent variables of
capital adequacy, share of non-performing loans, interest rates on interbank transaction,
inflation rate, business cycle financial crisis and size of banks and explore significance
positive relation between bank liquidity and capital adequacy, share of non-performing loans,
interest rates on interbank loans transaction, negative influence of inflation rate, business
cycle and financial crisis on liquidity. According to his findings, the relation between size of
banks and their liquidity is ambiguous. In this context, this study will try to identify the
determinants of liquidity and find out the degree of affection of those determinants and to
know about liquidity behavior. More specifically, this present study will carry out to answer
the following research question:
1. What are the determinants of liquidity in commercial banks of Nepal?

2. What is the relationship between bank specific variables and macro-economic
variables on liquidity of commercial banks in Nepal?
3. What are the effects of bank’s specific variables and macro-economical variables on
liquidity of commercial banks in Nepal?
1.3 Purpose of the Study
This study aims to analyze determinants of liquidity of commercial banks and their
relationship with the liquidity based on information available in Nepalese context. The
objectives of this study will examine the impact of the determinants of the liquidity of
Nepalese commercial bank. The specific objectives of the study are listed as below:
4
1. To assess the determinants of liquidity in commercial banks of Nepal.

2. To examine the relationship between bank’s specific variables and macro-economic
variables on liquidity of commercial banks of Nepal.
3. To examine the effect of bank’s specific variables and macro-economical variables
on liquidity of commercial banks in Nepal.
1.4 Significance of the Study
The study deals with determinants of level of liquidity in commercial banks of Nepal. The
study also significance lies mainly in identifying and comparing the determinants factors of
liquidity. Banks can use recommendation of this study for proactive management. It will
provide the real picture of ongoing condition which is beneficial to potential as well as
existing shareholders, about identifying risk return and make decisions of utilizing funds. The
study will also useful for depositors, merchant bankers as well as other stakeholders; they can
identify the overall performance and ongoing liquidity risk of the banks. It will be helpful to
those who want to conduct further study in this field. Mainly, the purposed study will be
significance for the researchers, research group and academicians for the future in the view of
review.
1.5 Limitations of the Study
The limitations of the study are:

1. The research only concentrates on determinants factors of level of liquidity in
commercial banks in Nepal.
2. Data only collected through secondary sources, does not include the preference of
different stakeholders.
3. The sample size and time period taken for the study is only covering nine banks and
eleven years.
4. The model used in this study and analysis is limited on some quantitative methods.
5. This study only used IBM SPSS software analysis tools.
6. Result of this study may differ according to different state of nature and time.
5
1.6 Organization of the Study
The whole study will divide into five chapters and the chapters are organized systematically
as follows for the effective study.
Chapter I: This chapter will consist of major issues to investigate along with the objective,
significance, focus and limitation of the study.
Chapter II: This chapter will be related to theoretical analysis a brief review of related
literature. It tries to show overall scenario of determinants of liquidity level, its determinants
and their effect in financial performance, especially analysis of commercial banks of Nepal.
Chapter III: This section will describe the methodology employed in the study. This chapter
deals with the nature and sources of data selection for study areas, method of analysis etc
Chapter IV: This chapter will deal with the presentation and analysis of data and major
findings by using proper tools and techniques.
Chapter V: The last chapter incorporated summary, conclusion and recommendation

emanating from the study.

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DETERMINANTS OF LIQUIDITY OF COMMERCIAL BANKS OF NEPAL

A Dissertation Submitted to the Office of the Dean, Faculty of Management in partial

Report of Research Committee

Chairperson, Research Committee Date: November 23, 2021

We have examined the dissertation entitled “Determinants of Liquidity in

I would like to thank my friends for their valuable suggestion, continuous

REPORT OF RESEARCH COMMITTEE iii

CHAPTER-I: INTRODUCTIONS 1-5

1.1 Background of the study 1

1.2 Statement of the problems 3

1.3 Purpose of the study 4

1.4 Significance of the study 4

1.5 Limitations of the study 5

1.6 Organization of the study 5

CHAPTER-II: LITERATURE REVIEW 6-21

2.1 Theoretical Review 6

2.1.1 Conceptual review 6

2.1.1.1 Capital adequacy ratio and bank liquidity 6

2.1.1.2 Non-performing loans and bank liquidity 7

2.1.1.3 Bank size and bank liquidity 8

2.1.1.4 Deposit amount and bank liquidity 8

2.1.1.5 GDP and bank liquidity 9

2.1.1.6 The rate of inflation and liquidity 9

2.1.2 Empirical review 10

2.3 Summery of literature review 14

2.4 Theoretical framework 17

2.4.1 Definitions of variables 18

2.5 Research gap 21

CHAPTER-III: RESEARCH METHODOLOGY 22-27

3.1 Research design 22

3.2 Population and sample 22

3.3 Sources of data and collection procedure 23

3.4 Data analysis procedure 24

3.5 Data analyzing tools 24

3.5.1 Financial ratios 24

3.5.2 Statistical tools 25

CHAPTER – IV: RESULT AND DISCUSSION 28-53

4.1 Descriptive analysis of variables 28

4.1.1 Analysis of bank’s specific variables 28

4.1.2 Descriptive analysis for the overall variables 38

4.2 Statistical Analysis 39

4.2.1 Correlation analysis 39

4.2.2 Regression analysis 43

4.2.2.1 Model summary 43

4.2.2.3 Regression coefficient 46

4.3 Major findings 49

CHAPTER –V: SUMMERY AND CONCLUSION 54-58

5.4 Areas of future research 57

Table No. Titles Page No.

As liquidity problems of some banks during global financial crisis re-emphasized,

1.1 Background of the study

Financial sector is the backbone of economy of a country. It works as a facilitator for

Liquidity means allocation of funds in close relation to their respective

As other organization higher profitability is ultimate aim of commercial banks. One

1.2 Statement of the problems

One of the major investment of commercial banks is liquidity. On every investment

Vodova, (2011) explored the determinants of liquidity of commercial banks by using

1. What are the determinants of liquidity in commercial banks of Nepal?

1.3 Purpose of the study

1.4 Significance of the study