The Effect of The Liquidity Management On Profitability in The Jordanian Commercial Banks

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International Journal of Business and Management; Vol. 10, No.

1; 2015
ISSN 1833-3850 E-ISSN 1833-8119
Published by Canadian Center of Science and Education

The Effect of the Liquidity Management on Profitability in the


Jordanian Commercial Banks
Ali Sulieman Alshatti1
1
Dept. of Banking and Finance sciences, Philadelphia University, Jordan
Correspondence: Ali Sulieman Alshatti, Dept. of Banking and Finance sciences, Philadelphia University, Jordan.
Tel: 962-795-630-502. E-mail: alialshati2008@gmail.com

Received: October 30, 2014 Accepted: November 18, 2014 Online Published: December 20, 2014
doi:10.5539/ijbm.v10n1p62 URL: http://dx.doi.org/10.5539/ijbm.v10n1p62

Abstract
This research seeks to investigate the effect of the liquidity management on profitability in the Jordanian
commercial banks during the time period (2005–2012). Thirteen banks have been chosen to express on the whole
Jordanian commercial banks. The liquidity indicators are investment ratio, Quick ratio, capital ratio, net credit
facilities/ total assets and liquid assets ratio, while return on equity (ROE) and return on assets (ROA) were the
proxies for profitability. Augmented Dickey Fuller (ADF) stationary test model was used to test for a unit root in
a time series of the research variables and then testing hypothesis by using regression analysis. The empirical
results show that a positive effect of the increase in the quick ratio and the investment ratio of the available funds
on the profitability, while there is a negative effect of the capital ratio and the liquid assets ratio on the
profitability of the Jordanian commercial banks. The researcher recommends that there is a need for an optimum
utilization of the available liquidity in a various aspects of investment in order to increase the banks' profitability,
and banks should adopt a general framework of liquidity management to assure sufficient liquidity for executing
their operations efficiently, and they should initiate an analytical study of the evolution rates of liquidity and their
ability to achieve a balance between sources and uses of funds.
Keywords: liquidity, profitability, ROE, ROA, acid liquid assets
1. Introduction
The liquidity in the commercial bank represents the ability to fund its obligations by the contractor at the time of
maturity, which includes lending and investment commitments, withdrawals, deposits, and accrued liabilities
(Amengor, 2010).
Liquidity also means the ability to finance the increase in assets and meet liabilities when they due fall without
any unexpected losses, and so the efficient management of liquidity in the bank help to make sure that the bank
is able to meet the incurred cash, which are usually uncertain and subject to external factors and to the behavior
of other agents.
The liquidity management is a vital factor in business operations. For the very survival of business, the firm
should have requisite degree of liquidity. It should be neither excessive nor inadequate. Excessive liquidity
means accumulation of ideal funds. Which may lead to lower profitability, increase speculation, and unjustified
extension. Whereas inadequate liquidity result in interruptions of business operations. A proper balance between
these two extreme situations therefore should be maintained for efficient operation of business through skill full
liquidity management.
1.1 Research Problem
The commercial banks play their mediation role by absorbing financial surpluses from their holders (depositors)
and put them at the disposal of investors (borrowers) to be directed towards various investment channels. This
investment activity carried out by the bank is hardly devoid of risks and problems, because the bank is seeking to
maximize its expected profits on these investments, and this requires optimum utilization of the available
resources, since the bank is exposed at any moment to meet the obligations of its clients and depositors who
want to withdraw their savings, and so the bank should be ready to meet these demands at any time.
The problem arises when the Bank is not able to meet these demands, especially those unexpected ones, which
may embarrass the bank with its clients and may lose their trust over the time, in light of the intensive

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competition in the banking sector resulting from the increasing number of local banks, as well as intensive
competition from the foreign banks that work in the local banking market.
Therefore, each commercial bank should work to maximize its profits, and at the same time be able to meet the
financial requirements of its depositors by holding a sufficient amount of liquidity, in order to achieve a balance
between the profitability and liquidity. The problem lies in how to choose or select the optimal point or level at
which banks can maintain their assets in order to achieve these two objectives together, because each level of
liquidity has a different effect on the levels of profitability, and the problem arises when the commercial banks
try to maximize their profit at the expense of neglecting the liquidity, which may cause a technical and financial
hardship with the consequent withdraw of deposits. Therefore, this research seeks to answer the following
questions:
 Does the efficient liquidity management affect profitability in the Jordanian commercial banks?
 How do the liquidity indicators affect profitability in the Jordanian commercial banks?
 What are the limitations that may hinder the achievement of the required balance between liquidity and
profitability, and how to overcome these limitations?
1.2 Research Objective
This research aims to examine the effect of the banking liquidity management on profitability in the Jordanian
commercial banks, considering their need to keep a highest balance between liquidity and profitability at the
same time. Therefore, this research will focus on identifying the most important indicators of the liquidity
management, investigate the effect of each indicator on the banks' profitability, identify the effect of the liquidity
management as a whole on profitability in the commercial banks, and lastly to suggest a recommendations
needed to achieve the required consensus between liquidity and profitability in these banks.
1.3 Research Design
The research is organized as follows: Section two presents an extensive review of literature on the effect of the
liquidity management on profitability in the commercial banks and the research hypotheses. Section three spells
out the methodological approaches used in this research. While Section four focuses on the analysis of the
research hypotheses, and to show the contribution of the research results in the provision of a new addition to
previous studies. Finally, section five reviews the findings and the recommendations reached by the researcher.
2. Literature Review
This section discusses some empirical and theoretical researches and publications about the effect of liquidity
management on the banks' profitability, and introduces an overview of Jordanian economy, and lastly presents
the study hypothesis.
2.1 Theoretical Literature
This part presents some theoretical aspects related to banks liquidity concept, the need for liquidity, theories of
liquidity management, banks profitability and its measures, as follows.
2.1.1 Banks Liquidity Concept
Bank liquidity means the ability to meet financial obligations as they come due. Liquidity in Commercial Bank
means the bank's ability to finance all its contractual obligations when due, and these obligations can include
lending, investment and withdrawal of deposits and maturity of liabilities, which happen in the normal course of
the Bank actions (Amengor, 2010).
2.1.2 Theories of Liquidity Management
There are a number of liquidity management theories, as follows:
1). Anticipated Income Theory
This theory states that the bank can manage its liquidity through the appropriate directing of the granted loans,
and the ability to collect these loans when due in a timely manner and to reduce the possibility of delays in
repayment at the maturity time.
This theory posts that bank's management can plan its liquidity based on the expected income of the borrower,
and this enables the bank to grant a medium and long-term loans, in addition to short-term loans as long as the
repayment of these loans are linked by the borrowers expected income to be paid in a periodic and regular
premiums, and that will enable the bank to provide high liquidity, when the cash inflows are regular and can be
expected.

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2). Shiftability Theory


Shiftability is an approach to keep banks liquid by supporting the shifting of assets. When a bank is short of
ready money, it is able to sell its assets to a more liquid bank. The approach lets the system of banks run more
efficiently: with fewer reserves or investing in long-term assets. Under shiftability, the banking system tries to
avoid liquidity crises by enabling banks to always sell or repo at good prices.
3). Liability Management Theory
This theory states that there is no need to follow old liquidity norms like maintaining liquid assets, liquid
investments etc., banks have focused on liabilities side of the balance sheet.
According to this theory, banks can satisfy liquidity needs by borrowing in the money and capital markets. The
fundamental contribution of this theory was to consider both sides of a bank’s balance sheet as sources of
liquidity (Emmanuel, 1997).
4). Commercial Loan Theory
This theory states that the liquidity of the commercial bank achieved automatically through self-liquidation of
the loan, which being granted for short periods and to finance the working capital, where borrowers refund the
borrowed funds after completion of their trade cycles successfully.
According to this theory, the banks do not lend money for the purposes of purchasing real estate or consumer
goods or for investing in stocks and bonds, due to the length of the expected payback period of these investments,
where this theory is proper for traders who need to finance their specific trading transactions and for short
periods.
2.1.3 The Concept of Banks Profitability
Bank profitability means its ability to generate revenues outweigh the cost, and this is regarding the basis of the
bank's capital, where the banking sector is sound and profitable, this sector will be more able to withstand
negative shocks and contribute to the stability of the financial system.
Profitability in general is a relationship between the profits generated by the enterprise and investments that
contributed to the achievement of these profits, and profitability considers as a goal of the institution and a
barometer for judging on its adequacy. The profitability measured by, either the relationship between profits and
sales, or by the relationship between the profits and the investments that contributed in achieving it.
2.1.4 Liquidity Measurement
Liquidity measures help to insure a bank’s ability to pay operating expenses and other short-term or current
liabilities. Because current liabilities are paid out of current assets within one year, liquidity measures are
calculated using current assets and current liabilities.
The main measures of liquidity current ratio, capital ratio, cash ratio, quick ratio, investment ratio, investment
ratio.
2.1.5 Assessment the Bank’s Profitability
In order to determine the extent of the bank ability to make profits from its invested money, there are different
financial ratios related to both the owners and depositors. The following ratios are the most important earnings
ratios used in assessing the bank profitability (Taha, 1999, p 190-191).
1). Return on assets (ROA)
This ratio measures the profitability achieved by the bank by investing its assets in various activities, and is
calculated by dividing net income (net profit after tax) on total assets, as follows: Return on assets (ROA) = (Net
income/ Total Assets) × 100.
2). Return on Equity (ROE)
This ratio measures the management efficiency in utilizing the bank funds in achieving a profit, and is calculated
by dividing net income (net profit after tax) on the owed capital, as follows: Return on equity (ROE) = (Net
income/ Capital) × 100.
3). Return on deposits (ROD)
Measures the rate of return on deposits over the bank's ability to generate profits from deposits, which succeeded
in getting it.
Return on deposits = (Net income/ Total deposits) × 100

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2.2 Empirical Review


A number of researches have examined the impact of liquidity management on the profitability in commercial
banks in a number of countries such as Jordan. The results varied from one research to another as follows.
Adebayo et al. (2011) examined liquidity management and commercial banks’ profitability in Nigeria. Findings
of this study indicate that there is significant relationship between liquidity and profitability. That means
profitability in commercial banks is significantly influenced by liquidity and vice versa.
Saleem and Rehman (2011) sought to reveal the relationship between liquidity and profitability. The main results
of the study demonstrate that each ratio (variable) has a significant effect on the financial positions of enterprises
with differing amounts and that along with the liquidity ratios in the first place. Profitability ratios also play an
important role in the financial positions of enterprises.
Arif (2012) tested liquidity risk factors and assessed their impact on (22) of Pakistani banks during the period
(2004-2009). Findings of the study indicate that there is a significant impact of liquidity risk factors on the banks
profitability, where an increase in deposits lead to increasing in the bank’s profitability in terms of reducing
dependence on the central bank in meeting the customers’ obligations, and profitability is negatively affected by
the allocation of non-performing loans and liquidity gap.
Charity (2012) examined the impact of liquidity performance in commercial using First Bank of Nigeria Plc as
case study. Findings indicate that there was a positive relationship between liquidity management and the
existence of any banks.
Agbada and Osuji (2013) examined empirically the effect of efficient liquidity management on banking
performance in Nigeria. Findings from the empirical analysis were quite robust and clearly indicate that there is
significant relationship between efficient liquidity management and banking performance and that efficient
liquidity management enhance the soundness of bank.
Al-Tamimi and Obeidat (2013) identified the most important variables which affect the Capital Adequacy of
Commercial Banks of Jordan in Amman Stock Exchange for the period from 2000 –2008. The study shows that
there is a statistically significant positive correlation between the degree of capital adequacy in commercial
banks and the factors of liquidity risk, and the return on assets, and there is an inverse relationship not
statistically significant between the degree of capital adequacy in commercial banks and factors of the capital
risk, credit risk, and the rate of force- revenue.
Ibe (2013) examined the effect of liquidity management on the profitability of banks in Nigeria. He found that
liquidity management is indeed a critical issue in the banking sector of Nigeria.
Lartey et al. (2013) sought to find out the relationship between the liquidity and the profitability of banks listed
on the Ghana Stock Exchange. It was found that for the period 2005-2010, both the liquidity and the profitability
of the listed banks were declining. Again, it was also found that there was a very weak positive relationship
between the liquidity and the profitability of the listed banks in Ghana.
Moein Addin et al (2013) investigated the relationship between modern liquidity indices and stock return in
companies listed on Tehran Stock Exchange. Results indicated that there was a positive and significant
relationship between comprehensive liquidity index and stock returns while there was no significant relationship
between the index of cash conversion cycle as well as net liquidity balance and sock returns.
Almazari (2014) investigated the internal factors that have an effect on profitability in Saudi and Jordanian banks.
He found that there is a positive correlation between profitability measured by ROA of Saudi and Jordanian
banks with some liquidity indicators, as well as there is a negative correlation with other liquidity indicators
between profitability measured by ROA of Saudi and Jordanian banks .
2.3 Jordanian Commercial Banks
The banking sector in Jordan distributed on three types of banks, namely:
 The commercial banks.
 The Islamic banks.
 The foreign banks in Jordan.
The Jordanian Commercial Banks consist of (13) Banks, as follows:

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Table 1. Jordan commercial banks


Bank No. Bank name Bank No. Bank name
The Arab bank The Housing bank
Jordan Kuwait bank Jordan national bank
Cairo Amman bank Bank of Jordan
Societe Generale Banque Union bank
Investment Bank Capital Bank of Jordan
ABC Bank Arab Jordan Investment Bank
Jordan commercial bank ---- -------------------------------------

2.4 Research Hypotheses


Based on the research questions and objectives, the research hypotheses can be formulated as follows:
H01: There is no statistically significant effect of the banking liquidity management on profitability in the
Jordanian commercial banks.
H02: There is no statistically significant effect of the investment ratio on profitability in the Jordanian
commercial banks.
H03: There is no statistically significant effect of the Net credit facilities / Total assets ratio on profitability in the
Jordanian commercial banks.
H04: There is no statistically significant effect of the capital ratio on profitability in the Jordanian commercial
banks.
H05: There is no statistically significant effect of the liquidity ratio on profitability in the Jordanian commercial
banks.
H06: There is no statistically significant effect of the quick ratio on profitability in the Jordanian commercial
banks.
2.5 What Distinguishes This Research from Other Previous Researches?
This research improves on some of the existing researches, in that it uses a variety of liquidity and profitability
indices to measure the effect of liquidity management on profitability in the Jordanian commercial banks. It also
contributes to the existing literature by providing a new addition to the previous literature about the effect of
liquidity management on profitability in the Jordanian commercial bank.
3. Research Methodology
3.1 Data Search
This research tries to investigate the effect of the liquidity management on profitability in the (13) Jordanian
commercial banks during the time period (2005–2012). By utilizing the data of the annual reports of the
Jordanian commercial banks, which issued by Amman Stock Market, to be in the form of (panel study type)
since this type of studies dealing with the same people, groups or organizations across multiple time periods
(Neuman, 2007).
3.2 Model Specification
The following two models represent the research models which formulated as follows:
Y1 = a0 + a1x1 + a2x2 + a3x3 + a4x4 + a5x5 (1)
Y2 = b0 + b1x1 + b2x2 + b3x3 + b4x4 + b5x5 (2)
Where: Y1, Y2: represents the bank’s profitability measured by ROE, ROA Respectively.
X1: Investment ratio = Net credit facilities / Total deposits.
X2: Net credit facilities / Total assets.
X3: Capital ratio = Capital/Total assets.
X4: Liquid ratio = Acid liquid assets / Total assets.
X5: Quick- Acid ratio = (Current assets- Inventory) / Current liabilities.
a1, a2, a3, a4, and a5: represents the coefficients values of the five independent variables of the first model,
respectively.

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Where b1, b2, b3, b4, and b5: represents the coefficients values of the five independent variables of the second
model, respectively.
a0, b0: represent the values of the vertical section.
The model number (1) measures the effect of the liquidity management indicators on profitability in the
Jordanian commercial banks, where return on equity (ROE) was the proxy for profitability.
The model number (2) measures the effect of the liquidity management indicators on profitability in the
Jordanian commercial banks, where return on assets (ROA) was the proxy for profitability.
3.3 Research Variables Definition
The independent variables represent the liquidity management, which include the following measures (Ratios):
Investment ratio = Net credit facilities / Total deposits.
Net credit facilities / Total assets.
Capital ratio = Capital / Total assets
Liquid ratio = Acid liquid assets / Total assets.
Quick- Acid ratio = (Current assets- Inventory) / Current liabilities.
The independent variables: Represent the bank’s profitability measured by the return on equity (ROE), and
return on assets (ROA).

Table 2. Variables definition & measurement units


Variables symbol Measurement unit Variables explanation
IR Investment Ratio Net credit facilities / Total deposits
NCF/TA Net credit facilities/ Total assets Net credit facilities / Total assets
CR Capital ratio Capital / Total assets
LR Liquid ratio Acid liquid assets / Total assets
QR Quick-Acid ratio Current assets - Inventory / Current liabilities
ROE Return on Equity Net Income/ Owners Equity
ROA Return on Assets Net Income/ Total Assets

Investment ratio: This ratio indicates to the appropriateness of investing the available funds to the bank which
derived from deposits, to meet the demands of credited loans and advances. Investment ratio = Credit facilities /
Total deposits.
Net credit facilities / total assets. This percentage represents the bank's ability to exploit and employ the available
funds in achieving profits, and also indicates to the financial burdens that assist the banks in determining the
level of risk.
Capital Ratio. It is a measure of a bank's financial strength and the adequacy of its capital, and it indicates to the
extent of financial stability at the Bank.
Liquid ratio: This ratio measures the ratio of Acid liquid assets, which includes cash & equivalent and cash
reserve at the central bank, short-term deposits in banks and other government and non-government guaranteed
securities as a percentage of total bank assets.
Quick- Acid ratio: This ratio measures the bank's ability to repay short-term obligations during a very limited
period (a few days), and by comparing them with short-term assets in the same period. Quick- Acid ratio =
(Current assets- Inventory)/ current liabilities.
Return on equity: This ratio used as a measure of a corporation's profitability by revealing how much profit a
company generates with the money shareholders have invested. Return on Equity = Net Income/Owner's Equity.
Return on assets: This ratio is an indicator of how a bank is profitable relative to its total assets, and gives an idea
as to how a management is efficient in using its assets to generate earnings. ROA = Net Income/total assets.
3.4 Data Analysis
This research applies the quantitative, descriptive, ratios and econometrics analysis approaches in investigating
the effect of liquidity management on profitability in the Jordanian commercial banks during the time period

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(2005–2012), including the analysis of the profitability and liquidity ratios, Cross Sectional Analysis, regression
analysis, correlation analysis, and test (F-Fisher) analysis, which are being estimated by the least squares method
(OLS), through applying the statistical program (E-Views) on the panel data related to the indicators of liquidity
and profitability during the study period, based the annual reports issued by the Jordanian commercial banks, and
Amman Stock Market, and other relevant previous studies conducted on the banking profitability and liquidity in
Jordan and in other countries around the world.
3.5 Statistical Analysis and Interpretation
Unit Root Test Results (1st Model)
Stationary of the expletory variables and the dependent variable of the 1st model, was tested by using
Augmented Dickey Fuller (ADF) test.
Table 3 views the results which indicate the rejection of the unit root null hypothesis of the stationary of the
research variables at the first difference.

Table 3. The results of unit root tests of independents variables on ROE


Variables ADF Statistics P- Value Order of Integration
Y1 16.5402 0.0000000 1(0)
X1 1.72769 0.0000420 1(0)
X2 4.74167 0.0000000 1(0)
X3 9.14883 0.0000000 1(0)
X4 4.82969 0.0000000 1(0)
X5 3.51313 0.0000002 1(0)
Source: Author computation from computer output.

Unit Root Test Results (2nd Model)


Stationary of the expletory variables and the dependent variable of the 2nd model, was tested by using
Augmented Dickey Fuller (ADF) test.
Table 4 views the results which indicate the rejection of the unit root null hypothesis of the stationary of the
research variables at the first difference.

Table 4. The results of unit root tests of independents variables on ROA


Variables ADF Statistics P- Value Order of Integration
Y1 3.4521 0.0000000 1(0)
X1 8.5464 0.0000420 1(0)
X2 4.7694 0.0000000 1(0)
X3 2.2720 0.0000000 1(0)
X4 4.4326 0.0000000 1(0)
X5 3.0464 0.0000002 1(0)
Source: Author computation from computer output.

Testing of the two models suitability


To examine the two models suitability for the research analysis, by using the distribution (F-Fisher) test, one of
the following hypothesis will be rejected;
Ho: the two models are not appropriate; if the independent variables don’t affect the dependent variables.
H1: the two models are appropriate; if the independent variables do affect the dependent variables.
The decision rule will be:
Accept H0 If (Sig. F) > 5%.
Accept H1 If (Sig. F) <5%.
From the analysis output, the value of (Sig. F) equals to (0.0000) for the two models which is less than 5%. This

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means the two models used are appropriate, and there is a statistically significant effect of liquidity management
on profitability in the Jordanian commercial banks.
The total change in the dependent variable (ROE) demonstrated by the independent variables (R-squared) equals
to (0.76) which is statistically significant at the level of less than (0.05) where (Sig. R = 0.0000), and the value of
the determination coefficient (adjusted R- squared ) equals to (0.68).
The total change in the dependent variable (ROA) demonstrated by the independent variables (R-squared) equals
to (0.66) which is statistically significant at the level of less than (0.05) where (Sig. R = 0.0000), and the value of
the determination coefficient (adjusted R- squared ) equals to (0.56).
The correlation analysis test:
To examine the correlation between the dependent variables and the independent variables, we accept one of the
following hypotheses:
H0: There is no correlation between liquidity management and banks profitability.
H1: There is a correlation between liquidity management and banks profitability.
The decision rule as follow:
Accept H0 if (Sig. R) > 5%.
Accept H1 if (Sig. R) <5%
The analysis outputs show that the significant of the correlation value equals to (Sig. R = 0.0000), that there is a
statistically significant correlation between liquidity management and banks profitability.
The research hypotheses test:
The following two models used to investigate the effect of the independent variables on banks profitability, as
follows:
Y1 = a ± a1 (X1) ± a2 (X2) ± a3 (X3) ± a4 (X4) ± a5 (X5)
Y2 = b ± b1 (X1) ± b2 (X2) ± b3 (X3) ± b4 (X4) ± b5 (X5)
Test results of the research hypotheses:
The hypotheses test shows the results as follows:
1). There is a statistically significant positive effect of the investment ratio on profitability of the Jordanian
commercial banks.
2). There is a statistically significant negative effect of the credit facilities divided by the total assets on
profitability of the Jordanian commercial banks.
3). There is a statistically significant negative effect of the capital ratio on profitability of the Jordanian
commercial banks, when the profitability measured by ROE, but this effect becomes positive when using ROA
as a proxy for profitability.
4). There is a statistically significant negative effect of the liquid ratio on profitability of the Jordanian
commercial banks.
5). There is a statistically significant positive effect of the quick ratio on profitability of the Jordanian
commercial banks.
To examine the total variation in the dependent variable explained by the independent variables, we accept one
of the following hypotheses:
Ho: Ho: There is no statistically significant effect of liquidity management on the profitability of the Jordanian
commercial banks.
H1: There is a statistically significant effect of liquidity management on the profitability of the Jordanian
commercial banks.

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Table 5. Coefficients of the independent variables on (ROE)


Variables Coefficients Sig. T
X1 + 0.126 0.0003
X2 - 0.262 0.0038
X3 - 0.215 0.0409
X4 -0.330 0.0000
X5 +0.153 0.0023
Constant +0.216 0.0000
Source: Author computation from computer output.

Table 6. Coefficients of the independent variables on (ROA)


Variables Coefficients Sig. T
X1 + 0.010 0.0081
X2 - 0.022 0.0056
X3 + 0.058 0.0502
X4 -0.054 0.0000
X5 +0.027 0.0000
Constant +0.016 0.0053
Source: Author computation from computer output.

Determining the coefficients values of the research models:


Based on the coefficients values in the two tables above, the regression equations will be written as follows:
Y1 = 0.216 + 0.126X1 - 0.262X2 - 0.215X3 - 0.330X4 + 0.153X5
Y2 = 0.016 + 0.010X1 - 0.022X2 + 0.058X3 - 0.054X4 + 0.027X5
The first equation indicates that the profitability as measured by return on equity is effected positively by the
investment and quick ratios, and negatively affected by the other variables.
While the second equation indicates that the profitability as measured by return on assets is effected positively
by the investment ratio, Net credit facilities/ Total assets, and the quick ratio, but the profitability is negatively
effected by the two other variables.
5. Findings
This research seeks to investigate the effect of the banking liquidity management on profitability in the Jordanian
commercial banks, through identifying the indicators of banking liquidity and profitability during the time period
(2005–2012).
The review of the preliminary figures showed that there is a lack of uniformity in these figures during the
research period, and the analysis results show that there is a positive effect of some liquidity indicators on the
profitability of these banks, and this result is consistent with the findings mentioned by (Bourke, 1989) where he
found in his study that there is a positive relationship between the banking liquid assets and banks profitability,
which was conducted on the 90 banks in Europe, North America, and Australia during the period (1972–1981).
It is noted that an increase in the investment ratio, as well as in the quick ratio lead to an increase in profitability
by rising the return on equity (ROE), and that means the profitability in the commercial banks increases with an
increase in the quick ratio and the investment ratio, this result is consistent with the findings of (Adebayo et al,
2011) in their research, and is contrary to the conclusion reached in the study of (Shahatiet, 2011).
The results also indicate that a decrease in the percent of the invested funds out of the total available funds, as
well as a decrease in capital, and in Acid liquid assets, lead to increase in profitability in the Jordanian
Commercial Banks when measured by ROE, but an increase in the capital ratio leads to increase in profitability
as measured by ROA.
The researcher notes that, the result of decreasing in the percent of invested funds as well as in the Bank capital
contribute in increasing profitability in the Jordanian commercial banks, this result does not correspond with the
logic which indicates that an increase in invested funds and in capital lead to an increase in profitability. While
the result of decreasing in the percent of Acid liquid assets leads to increase in banks profitability, is logical and
compatible with the principle of tradeoff between liquidity and profitability (decreasing in the liquid assets leads

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to a decrease in liquidity and at the same time leads to an increase in profitability).


6. Summary and Conclusion
The major aims of this research were to find empirical evidence of the degree to which effective liquidity
management affects profitability in commercial banks and how commercial banks can enhance their liquidity
and profitability positions.
Based on the research findings, the researcher concluded that, there is an effect of the liquidity management on
profitability in the Jordanian commercial banks as measured by ROE or ROA, where the effect of the investment
ratio and quick ratios on the profitability is positive when measured by ROE, and the effect of capital ratio on
profitability is positive as measured by ROA, and the effect of the other independent variables on the two
measures of profitability (ROE and ROA) is negative, the researcher thinks that this negative effect is due to the
increased volume of untapped deposits at the Jordanian commercial banks.
Thus, a bank needs to maintain adequate liquidity, which greatly affects profits.
Consequently, the researcher recommends that there is a need to invest the excess of liquidity available at the
banks, in a various aspects of investments in order to increase the banks’ profitability and to get benefits from the
time value of the available money, also the Jordanian commercial banks should adopt a general framework for
liquidity management to assure a sufficient liquidity for executing their works efficiently, and there is a need to
make an analytical study of the liquidity evolution rates to assess the banks’ ability to achieve a balance between
sources and uses of funds, the banks need to adopt of a scientific methods in detection of the strengths and
weaknesses points of liquidity, especially in light of the sudden circumstances that may be exposed by banks.
References
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