Investigating Relationship Between Liquidity and Profitability Ratios in Banks

Abstract

There is no doubt that with the intensification of the financial and political crisis in recent years in Afghanistan, many banks faced a severe financial and profitability crisis, in general, among many registered and official banks in the Central Bank of Afghanistan, a large number it suffers from liquidity problem and lack of profitability. Liquidity refers to how assets can be converted into cash at the earliest time or at the lowest cost, which is called an asset with high liquidity. In terms of liquidity, the asset's liquidity is high, so it can be converted into cash at a very low cost and quickly. The higher the liquidity of an asset, the more useful it will be. Also, profitability shows the bank's ability to earn income from its assets. After examining variables such as (benefit or profitability, return on capital and liquid assets), this research examines the relationship between banks' liquidity ratios and profitability using multivariable linear regression during the years (2016-2020). The research findings show a weak but positive relationship between liquidity ratios and profitability of banks, considering the research results  and also smaller than α= 0.05, so the null hypothesis can be rejected and the alternative hypothesis can be confirmed.