Abstract: In the portfolio of commercial banks, liquidity assets play a very crucial role because banks operate largely with the funds borrowed from depositors in form of demand and time deposits. These liquidity assets are the essential balance sheet items which have the capacity to maintain the confidence of depositors which is the most valuable intangible asset of the commercial banking business. The same time liquidity level should not fall below minimum requirement as it lead to the inability of the organization to meet short term obligation that are due. Many banks have investment in safe and high yielding illiquid assets but are tied up in loans. Some banks despite having a lot of assets, the sudden withdrawals and the lack of liquid funds lead to a huge loss as a result of taking out emergency loans. This was identified as the major cause of bank failures. The general objective of the study was be to analyse the effect of liquidity management practices on profitability of commercial banks in Kigali. The following are specific objectives of the study: To analyze the effect of liquidity ratio on profitability of commercial banks in Kigali, To examine the effect of Loan to Deposit Ratio on profitability of commercial banks in Kigali and to evaluate the effect of Cash Reserve Ratio of commercial banks in Kigali. Population of this study was 20 banks staff whose views and knowledge can derive the study. As the target population were found to be small. There was no need for sampling, the researcher applied census method. Questionnaires distributed to 20 staff (Operation department, Finance department and Treasury Department) from Ecobank. The mentioned people were chosen purposively due to the nature of their roles of dealing with liquidity on daily basis. The researcher used both primary data and secondary data, primary data collected using structured questionnaire and secondary data collected using documents like books, journals and internet. Questionnaires tested by two experts in academic research to ensure that the questionnaires can answer the set objectives and hypotheses which are also to be tested. However, Liquidity ratio (0.739) has greater influence on bank profitability followed by Cash reserve ratio (0.48 8) and lastly Loan to deposit ratio (0.166). This implies that embarking on either of the variables would improve bank profitability. Since the Pearson Correlation value was 0.969 and it is significant, the researcher proved that there is very strong and positive relationship between liquidity management practices and profitability. Bank should maintain strategy for the day-to-day management of liquidity management.
Keywords: commercial banks, depositors, bank profitability liquidity management.
Title: EFFECT OF LIQUIDITY MANAGEMENT PRACTICES ON PROFITABILITY OF COMMERCIAL BANKS IN RWANDA: A CASE STUDY: ECOBANK
Author: MUREKATETE Josephine, Dr. Patrick Mulyungi, Dr. Noor Ismail
International Journal of Management and Commerce Innovations
ISSN 2348-7585 (Online)
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