Liquidity Dynamics: Macroeconomic and Bank Factors in Pakistan's Commercial Banks

Abstract

Financial system stability has been gaining crucial consideration on both national and international levels in terms of structural, institutional, and macroeconomic aspects. Money as a medium of exchange and banks as an intermediary cannot be comprehended by visualizing a world without it. It can be observed that old modalities of the banking system have been replaced by many innovations in the new millennium. To evaluate the soundness and steadiness of a banking sector, it is considered imperative to associate the banking system with its liquidity position. Therefore, this research is conducted to determine the influence of bank-specific and macro-environmental variables on the commercial (conventional and Islamic) bank’s liquidity in Pakistan. The data is taken from 20 commercial banks over the period 2009 to 2020 and a fixed effect estimation technique is used. The study found that leverage (LEV) and capital adequacy ratio (CAR) have a negative but significant impact on the liquidity of the banks. Moreover, the exchange rate (FER) has a positive and significant effect on the liquidity of commercial banks. The outcome deducted from this study would be beneficial for bank managers in identifying and liquidity position of Islamic and conventional sector banks, policy maker which enforces banks to improve their performance as per the liquidity policies they made after reviewing the liquidity of banks, individuals as it tells which sector is profitable for investing and lending purposes.