International Journal of Business and Social Science

Vol. 4 No. 3; March 2013

The Relationship between Liquidity and Profitability of Listed Banks in Ghana

Victor Curtis Lartey1
Samuel Antwi1,2
Eric Kofi Boadi 1
1

Koforidua Polytechnic, P.O.Box KF981, Koforidua, Ghana

2

School of Finance and Economics, Jiangsu University,

301 Xuefu Road, Zhenjiang, Jiangsu, Peoples Republic of China
Abstract
The study sought to find out the relationship between the liquidity and the profitability of banks listed on the
Ghana Stock Exchange. Seven out of the nine listed banks were involved in the study. The study was descriptive in
nature. It adopted the longitudinal time dimension, specifically, the panel method. Document analysis was the
main research procedure adopted to collect secondary data for the study. The financial reports of the seven listed
banks were studied and relevant liquidity and profitability ratios were computed. The trend in liquidity and
profitability were determined by the use of time series analysis. The main liquidity ratio was regressed on the
profitability ratio. 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.

Key words: Bank, Profitability, Liquidity, Assets, Ratios

1.0 Introduction
General Banking business involves the mobilization of funds from excess or surplus units of the economy and
giving out to deficit units as loans and advances. This is called financial intermediation. The performance of
these functions by banks opens them to several risks; prominent among these is liquidity risk. Liquidity risk is the
risk of loss to a bank resulting from its inability to meet its needs for cash. The liquidity of a commercial bank is
its ability to fund all contractual obligations as they fall due. These may include lending and investment
commitments and deposit withdrawals and liability maturates, in the normal course of business (Amengor, 2010).
In other words, bank liquidity refers to the ability to fund increases in assets and meet obligations as they fall due.
In Ghana, Banking Act 2004 (Act 673) Section 31 urges banks to keep 9% of their deposits as primary reserves in
an account with Bank of Ghana, which is used primarily to settle inter-bank indebtedness, and also as insurance
for depositors.
Bank profitability is the ability of a bank to generate revenue in excess of cost, in relation to the banks capital
base. A sound and profitable banking sector is better able to withstand negative shocks and contribute to the
stability of the financial system. (Athanasoglou, Brissimis and Delis, 2005). The majority of studies on bank
profitability, such as Short (1979), Bourke (1989), Molyneux and Thornton (1992), Demirguc-Kunt and Huizinga
(2000) and Goddard et al. (2004), used linear models to estimate the impact of various factors that may be
important in explaining profits. Bank profitability is usually expressed as a function of internal and external
factors. The internal determinants of bank profitability are also known as micro or bank-specific determinants.
These can be broadly classified into two financial statement variables and non-financial statements variables.
The financial statement variables which determine bank profitability are: expense management, loan composition
and bank credit, composition of bank deposits, market interest rates, bank earning and operating efficiency,
changes in capital and liquidity management. The non-financial statement variables which determine bank
profitability include number of bank branches, bank size and bank location. The external determinants are
variables that are not related to bank management but reflect the economic and legal environment that affect the
operation and performance of financial institutions (Athanasoglou, Brissimis and Delis, 2005). These factors
include: financial regulation, competitive condition, concentration, market share, market growth and ownership.
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There have been many researches on the determinants of bank profitability and almost all find liquidity to be one
of the determinants of bank profitability. Examples include Bourke, (1989), Bashir, (2000), Karasulu, (2001),
Guru, Staunton and Balashanmugam (2002), Staikouras, and Wood (2003) and Naceur, (2003). Meanwhile, there
have been varying reports on the relationship between bank liquidity and profitability. Some argue, per their
research findings, that banks holding more liquid assets benefit from a superior perception in funding markets,
reducing their financing costs and increasing profitability. For example, Bourke (1989) finds some evidence of a
positive relationship between liquid assets and bank profitability for 90 banks in Europe, North America and
Australia from 1972-1981. On the other hand, other researchers argue that, holding liquid assets imposes an
opportunity cost on the bank given their low return relative to other assets, thereby having a negative effect on
profitability. For example, Molyneux and Thornton (1992) and Goddard, et al (2004) find evidence of a negative
relationship between the two variables for European banks in the late 1980s and mid1990s, respectively.
According to Eichengreen and Gibson (2001), the fewer the funds tied up in liquid investments, the higher we
might expect profitability to be. In effect, various authors have found varying relationships between the liquidity
and profitability of banks in various countries. However, no such study has been carried out in Ghana, specifically
to find out the relationship between the liquidity and profitability of banks in Ghana. This research therefore
sought to find out the relationship existing between the liquidity and the profitability of banks in Ghana, with
specific reference to those listed on the Ghana Stock Exchange. The purpose of the study was to find out the
relationship between the liquidity and the profitability of banks listed on the Ghana Stock Exchange.

2.0 Methodology
2.1 Research Design
This study seeks to describe the relationship between the liquidity and the profitability of banks listed on the
Ghana Stock Exchange. The study adopts the longitudinal time dimension, specifically the panel study type. Panel
study is a powerful type of longitudinal research in which the researcher observes exactly the same people, group,
or organisation across multiple time points (Neuman, 2007). In this study, particular banks listed on the Ghana
Stock Exchange were examined in terms of their liquidity and profitability across time period of 2005-2010. The
population of this study was made up of all commercial banks listed on the Ghana Stock Exchange. These
included CAL Bank Limited, Ecobank Ghana Limited, Ecobank Transnational Incorporated, Ghana Commercial
Bank Ltd., HFC Bank Ltd, SG-SSB Ltd., Standard Chartered Bank Ltd., Trust Bank Ltd. and UT Bank Limited.
In this study, purposive sampling was used to select seven (7) out of the nine (9) banks listed on the Ghana Stock
Exchange. The two banks excluded were Ecobank Transnational Incorporated and Trust Bank Ltd. These banks
were excluded from the study because their financial statements were reported in currencies other than Ghana
Cedis. Ecobank Transnational Incorporated reported in US Dollars while Trust Bank Ltd reported in Dalasi.
Including the above two banks in the research would distort the analyses and comparison.
2.2 Instrumentation and Data Collection
Data was mainly collected from secondary sources. Data emanated from listed banks financial reports, published
and unpublished books, scholarly journals, business and financial news papers and other magazines and corporate
journals. As the study needs historical financial data, which are from corporate reports, accessing publicly
available data is assumed as the suitable method for the accuracy of the data. As public data is accessible to
everyone; the study made use of the financial performance data which were of interest to the present research.
Financial reports and other relevant information of the listed banks for the period 2005-2010 were retrieved from
the internet, by search engines.
2.3 Analysis of Data
Quantitative analysis techniques were adopted for the study. These included profitability and liquidity ratios
analyses, time series analysis, and regression and correlation analyses.
Absolute profit and liquid assets figures of the listed banks were analysed and compared, to see the trend within
the period 2005-2010. Profitability and liquidity ratios of the banks were also analysed and compared to notice the
trend in profitability and liquidity within the period 2005-2010. The profitability ratios of the listed banks (Y
axis) were then regressed against their liquidity ratios(X axis) to determine the least square regression lines and
equations. The correlation coefficients and coefficients of determination were identified to describe the strength of
the relationship.
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For the purpose of the regression, the profitability measure was Return on Asset (ROA) Profit after Tax over
Total Assets. The liquidity measure used was Temporary Investment Ratio (TIR) Cash and Cash Equivalents
over Total Assets. The least squared regression line equation was in the form: y = abx + ba; where y =
profitability (dependent variable); x = liquidity (independent variable); a = the gradient of the regression line; b =
the y intercept

3.0 Empirical Results

Figure 1: Listed Banks Included In the Study

LISTED BANKS
22%
INCLUDED
78%

EXCLUDED

(Source: Authors Computation, 2011)

Figure 1 shows that the listed banks included in the study form 98% of the total number of banks listed on the
Ghana Stock Exchange. This means the majority of the listed banks were included in the study.
Figure 2: Average Total Assets, Equity and Total Liabilities of Listed Banks
1,200,000.00

1,054,137.41

1,000,000.00

888,027.31

912,400.65
774,897.56
689,672.25
Total Asset
616,189.54
600,000.00
497,590.00
Equity
344,551.44
434,147.35
400,000.00
Liability
263,797.87
302,308.17
231,078.63
200,000.00
113,129.76
32,719.24 42,243.27 63,442.65
141,736.76
73,482.71
800,000.00

2005

2006

2007

2008

2009

2010

(Source: Authors Computation, 2011)

Figure 2 shows the Total Assets, Total Liabilities and Equity of the average listed bank. It clearly indicates that
the Total Assets and the Total Liabilities of the average listed bank increased at the same pace. It meant that a
very huge proportion of a (listed) banks Total Assets was financed by external debt. This is in line with normal
banking business because banking, to a greater extent, has to do with accepting customers deposits, (liabilities)
which in turn could be lent as loans and advances (assets) to individuals and corporate entities. Majority of a
banks assets are financed by liabilities.

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Figure 3: Average Proportions of Total Liabilities and Equity

Total Assets
12%

Liabilities
Equity

88%

(Source: Authors Computation, 2011)

Figure 3 shows that about 88% of the Total assets of the average listed bank at a point in time are financed by
Total Liabilities. The remaining 12% is financed by Equity.
3.1 Profitability trend of banks listed on the Ghana Stock Exchange
Figure 4: Interest Income and Spread of the Average Listed Bank
160,000.00

149,828.13

140,000.00

117,480.71

120,000.00

y = 13744x + 5301.
102,259.85Interest Income

100,000.00
80,000.00
60,000.00
40,000.00

y = 23117x - 1212.

76,348.22

53,260.97
65,757.91
45,365.20
51,146.11
35,896.40
39,734.36

Spread
Linear (Interest Income)
Linear (Spread)

34,329.05
27,194.95

20,000.00
2005

2006

2007

2008

2009

2010

(Source: Authors Computation, 2011)

Figure 4 Presupposes that there is a direct positive relationship between the Interest Income of the average listed
bank and its Spread. Both have been increasing from the period 2005 up to 2010. Spread is the Excess of Interest
Income over Interest Expense.

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Figure 5: PBT and PAT of the Average Listed Bank

60,000.00

y = 6355.x + 5271.
49,788.65

50,000.00
40,000.00
30,000.00

21,682.62
19,537.64
20,000.00 14,391.17
10,000.00
8,985.42

2005

13,114.76

2006

y = 4618.x + 3208.
PBT

33,030.95
26,668.40

15,942.76

2007

20,047.12

2008

33,686.32
24,455.85

2009

PAT
Linear (PBT)
Linear (PAT)

2010

(Source: Authors Computation, 2011)

Figure 5 Shows that the trends in Profit before Tax and Profit after Tax of the average listed bank were almost the
same. Both PBT and PAT of the average listed bank had been increasing within the period 2005-2010. This
means that generally, profits of the listed banks were increasing within the period 2005 2010.
Figure 6: Profitability of the Average Listed Bank
90.00
80.00
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00

75.76

75.67

74.60

y = -2.978x + 79.96

66.99

68.25
55.97
27.46

3.41
2005

31.05
3.81
2006

25.13
3.20
2007

27.28
2.91
2008

ROE
ROA

21.62

23.77

2009

2010

SM
y = -1.274x + 30.51
3.20
2.75
y = -0.128x + 3.662

(Source: Authors Computation, 2011)

Figure 6 shows the Spread Margin (SM), Return on Assets (ROA) and Return on Equity (ROE). It indicates that
the profitability of the average listed bank has been reducing generally. These are shown by the trend lines of
Spread Margin, Return on Assets and Return on Equity. Spread Margin is the Spread over Interest Income times
100.

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3.2 Liquidity Trend of Banks Listed On the Ghana Stock Exchange

Figure 7: Comparison of Liquid Assets, Illiquid Assets, with Total Assets
1,200,000.00
1,054,137.41
1,000,000.00

y = 16497x + 45542

888,027.31

y = 12005x + 40862
Total Assets
800,000.00
765,726.24
689,672.25
Liquid Assets
648,363.85
600,000.00
497,590.00
Illiquid Assets
514,657.83
Linear (Total Assets)
344,551.44
400,000.00
401,518.98
288,411.17
Linear (Liquid Assets)
263,797.87
247,744.82
200,000.00
239,663.46
Linear (Illiquid Assets)
188,334.41
175,014.43
y = 44921x + 4679.
96,806.62 96,071.02
-75,463.46
2005

2006

2007

2008

2009

2010

(Source: Authors Computation, 2011)

Figure 7 shows that there have been increases in all categories of assets. However, the increase in Total Assets
results in higher increase in Illiquid Assets than in Liquid Assets. The Liquid Assets increased in 2006 and
reduced by a margin in 2007. Thereafter, it increased continuously up to the year 2010. The equations of the trend
lines show general increase in Liquid Assets over the years 2005-2010, though there was a fall in 2007.
Figure 8: Percentages of Liquid Assets and Illiquid Assets

Total Assets
26%
Liquid Assets
74%

Illiquid Assets

(Source: Authors Computation, 2011)

Figure 8 shows that the average listed bank holds about 26% of its Total Assets in the form of Liquid Assets,
while the remaining 74% is locked up in the form of Illiquid Assets.

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Figure 9: Liquidity of the average listed bank

35.00

32.66

32.02

30.00
25.00

28.61

28.40
22.13

28.10

20.00

25.38

30.93

31.61

y = -0.064x + 29.84

26.99

27.36

y = -0.099x + 26.30
LLR

19.31

TIR

15.00
10.00

Linear (LLR)

5.00

Linear (TIR)

0.00
2005

2006

2007

2008

2009

2010

(Source: Authors Computation, 2011)

Figure 9 shows that both Temporary Investment Ratio (TIR) and Liquid Assets to Long-term Liabilities (LLR) of
the average listed bank portray the same trend in liquidity. The trend lines show that there has been a general
decreasing effect in liquidity within the period 2005-2010. Even though the average listed bank has been
increasing its Liquid Assets, there has been a reduction in the general level of liquidity.
3.3 The relationship between the liquidity and the profitability of banks listed on the Ghana Stock
Exchange
In order to find out the relationship which exists between the liquidity and the profitability of the banks listed on
the Ghana stock exchange, their profitability (ROA) were regressed against their liquidity (TIR).
Figure 10: Liquidity and Profitability of the Average Listed Bank
35.00

y = -0.099x + 26.30

30.00

28.61

28.10

25.38

25.00

26.99

27.36
TIR

20.00

19.31

ROA

15.00

Linear (TIR)

10.00
5.00

3.41

3.81

3.20

y = -0.128x + 3.662
2.91
2.75

Linear (ROA)
3.20

0.00
2005

2006

2007

2008

2009

2010

(Source: Authors Computation, 2011)

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ROA

Figure 11: Relationship between Liquidity and Profitability of the Average Listed Bank
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0.00

y = 0.025x + 2.545
R = 0.056

ROA
Linear (ROA)

0.00

10.00

20.00

30.00

40.00

TIR

(Source: Authors Computation, 2011)

Figure 10 and figure 11 show that the relationship between the liquidity and the profitability of the average listed
bank is a weak positive relationship. The regression line of ROA on TIR is Y = -0.025X + 2.545. The coefficient
of correlation (R) is 0.237 while the coefficient of determination (R2) is 0.056.

4.0 Discussion
The results show that within the period 2005-2010, the listed banks were increasing both liquid assets and illiquid
assets. Despite the fact that the liquid asset holdings of the listed banks were increasing, their liquidity was
decreasing in the period, 2005-2010. The listed banks had their lowest liquidity in 2007. The listed banks were
increasing their absolute profit figures within the period 2005-2010. Despite this, their profitability was actually
declining within the period 2005-2010. The research revealed a weak positive relationship between the liquidity
and the profitability of the average listed bank in Ghana. Using Return on Assets (ROA) and Temporary
Investment Ratios (TIR) as the main representatives of profitability and liquidity respectively,
The regression equation was Y = 0.025X + 2.545,
Where Y = Return on Asset (Profitability)
X = Temporary Investment Ratio (Liquidity)
Correlation Coefficient (R) is 0.237
Coefficient of Determination (R2) is 0.056
This means that only 5.6% of increase in profitability could be caused by increase in liquidity.

5.0 Conclusion
In conclusion, both the liquidity and the profitability levels of the listed banks were decreasing within the period
2005-2010. There was a weak positive relationship between the liquidity and the profitability of the listed banks.
These findings support Bourke (1989) who found some evidence of a positive relationship between liquid assets
and bank profitability for 90 banks in Europe, North America and Australia from 1972 to 1981. In view of the
fact that liquidity has some amount of bearings on the profitability of a bank, it is important that banks manage
their liquidity very well. When banks hold adequate liquid assets, their profitability would improve. Adequate
liquidity helps the bank minimise liquidity risk and financial crises. The bank can absorb any possible unforeseen
shock caused by unexpected need for decrease in liabilities or increase in assets side of the Statement of Financial
Position. However, if liquid assets are held excessively, profitability could diminish. Liquid assets usually have no
or little interest generating capacity. The opportunity cost of holding lowreturn assets would eventually outweigh
the benefit of any increase in the banks liquidity resiliency as perceived by funding markets.

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