Effect of Liquidity Management on the Profitability of Zabzugu Rural Bank in the Northern Region

Abstract

The successful management of liquidity is essential to ensure the survival of the banking industry and to inspire public confidence. In this study, the impact of liquidity management on the financial performance of Zabzugu Rural Bank in the Northern Region was investigated, using data from 2017 to 2021. Specifically, the study analyzed the effects of liquidity and liability management on the bank's financial performance, measured through returns on assets, returns on equity, profit margin, and net interest margin. The study utilized the liquidity preference theory and employed an explanatory design and quantitative approach, analyzing the objectives of the study with a least square regression model. The study discovered that the liability of the bank did not directly affect the bank's financial performance. However, during the sample period, the bank employed reasonable liquidity management, investing more assets and a portion of deposits in risky investments. As a result, the decreasing levels of the bank's liquidity were found to positively affect the returns on assets, returns on equity, and profit margin of Zabzugu Rural Bank in the Northern Region. The study recommended that the bank's management align its liabilities with short-term assets such as short-term loans to creditworthy customers. This will enable the bank to generate sufficient revenue to match its liabilities and mitigate the risk of a mismatch in the timing of the creation of assets and revenue. Additionally, bank is encouraged to adopts a realistic strategy for increasing the amount of liquid cash in its assets through reinvestment. However, the potential impact of this technique on the bank's financial performance should be carefully monitored and managed.