Assessing the Impact of Liquidity on Bank Profitability: A Comparative Study of Public and Private Banks in Afghanistan

Abstract

This study examines the effect of liquidity on the profitability of banks. Profitability is measured through Return on Assets (ROA), while liquidity is analyzed using financial ratios such as the Quick Ratio (QR), Current Ratio (CR), and Cash Ratio. The size of the bank is considered as a control variable. The study uses data collected from nine banks—three state-owned and six private—over the five-year period from 2016 to 2020.  Based on preliminary tests, data exhibits a panel structure and according to model specification tests result a Pooled OLS regression model has been employed, the findings indicate that return on asset (ROA) has a significant and positive relationship with both cash ratio and the current ratio, while it shows a negative and insignificant relationship with the quick ratio. Furthermore, this effect is not significant across large, medium and small banks, suggesting that bank size does not have a meaningful impact on asset returns. Additionally the result of the two-sample  t-test and one-way ANOVA reveal that the impact of liquidity ratios on asset returns is more favorable in state-owned banks compared to private banks, with state-owned banks demonstrating a higher average return on assets. Ultimately, the result can be valuable not only for bank management but also for researchers and those interested in the banking sector.