1.

Introduction

1.1 Background of study

Commercial banks are in the business of providing banking services to
individuals, small business and large organizations. Todays
commercial banks are more diverse than ever. There is a tremendous
range of opportunities in commercial banking, from the branch level
where you might start out as a teller to a wide variety of other services
such as trade credit. Small business are also highly dependent on the
goodwill of commercial bankers perform core financial analysis to
assess risk credit worthiness and the likelihood that business will
succeed (Muralaa dharan: 2013)
All over the world, financial managers make finance and investment
decisions of considering an objectives of wealth maximization. A whole
range of techniques might be used to maximize revenues or minimize
costs. Working capital management basically covers planning and
controlling activities of the core business. Efficient management of
working capital is an important aspect of the overall corporate strategy
towards creating shareholders value (Makori and Vagongo, 2013). The
approach that a firm uses in managing working capital can have
significant impact on both its liquidity and profitability (shin and
soenen, 1998).
Liquidity and profitability are two crucial issues that organizations
management always consider evaluating the financial health of the
company. Liquidity refers to the conversion of the assets into cash.
Commercial banks have to maintain satisfactory level of liquid assets
that are easy to rate at market price with less transaction cost.
Commercial bank holds liquid assets in the form of currency, bank
balance, marketable securities and other assets immediately
converted into cash. But these can be invested for some period to earn
interest than to keep idle cash balances. Example: Banks need to hold
enough to cover excepted demand from depositors, creditors and
counter parties. During the global financial crises it became clear that
many weight the benefits and costs of holding these various liquidity
assets balances. The determination of optimal liquid assets balances
reflects the classic risk return trade-off facing the commercial banks. A
commercial bank can increase its profitability in relation to its assets
base minimizing liquid assets balances. Effective cash management
calls for a careful balancing of the risk and return aspects of cash
management. Liquidity plays a crucial role to both the external and
 internal analysis because of its close relationship with day to day
operations of a business. Weaker liquidity position poses a threat to
the solvency as well as profitability poses a threat to the solvency as
well as profitability of a firm and makes it unstable current ratio and
quick ratio are two common measures of the liquidity of a company.
Profitability is a measure of the amount of which a firms revenues
exceeds the expenses.

1.2 Statement of Problem and Research Question

The main focus of the study is the impact of liquidity management on
profitability in Nepalese commercial banking sector. The study
concentrates on the study of profitability and liquidity. The researcher
during the research may found difficulty while studying on the research
work. The problem of the study deals with is to empirically test the
theoretical hypothesis regarding the relationship between liquidity and
profitability. First it will tested the tradeoff in the short term, then the
positive interdependence on the medium to the long term, and finally
the relationship during the crises year. By dealing with these problems
it is expected to improve the general knowledge of working capital
management, and thus contribute to the development of this financial
activity. For this study following question has been raised.
1. Is there a negative relationship between liquidity and profitability
on the short run?
2. Is there a positive relationship between liquidity and profitability
on the medium to long run?
3. How profitability and liquidity influence each other?
4. Did the companies with a better liquidity ratio have a better
performance during the financial crises?
1.3 Objectives of the study
The main focus of the study are:-
1. To show the relationship between profitability and liquidity of the
selected bank.
2. To analyzed the assets of the organization.
3. To find out the impact of liquidity positive increases or decrease
effects on the profitability.
4. To improve the return on investment and liquidity
5. To maximize profit, maintaining liquidity of the firm.
 1.4 Theoretical Framework

Banks Banks
liquidity
- Loans to deposits ratio (LDR)profitability
- Net Interest Margin (NIM)
- Liquid assets to deposit ratio - Return on Assets (ROA)
(LADR) - Return on Equity (ROE)

1.4 Significant of Study

Every organization has established with certain objectives so,
commercial banks are always guided with the objectives of the profit
mobilization. To study and analyzed the relationship between liquidity
and profitability which plays an important role of the managerial
decision. These studies signify for those who are willing to know about
the financial position of the financial institutions. This study will be
more useful for manager to take the managerial action regarding
profitability and liquidity and to get the information. All the financial
decisions of commercial banks are for the betterment of the
shareholders wealth. The findings of the study can guide finance
managers in banks to make investment decisions that will satisfy the
shareholders interest with regard to liquidity and profitability needs of
the investors. Identification of liquidity levels that maximizing profits
enables managers revise and adopt relevant strategies. This will help
them formulate rules and regulations that helps minimize failure risk in
the sectors. It will be useful for teachers and students too. So, this
study is beneficiary for shareholders, researchers, public and
managers who would conduct study on liquidity and profitability.

1.5 Limitations of the study

Findings reliable data is the main problem for researcher for research
activities. Due to lack of adequate information on subject matters due
to variable. The following limitations are pointed out in this study of
relationship between the liquidity and profitability of bank:
1. This study is based on secondary data and information as per
available data and report provided by the concern bank.
2. This study only concentrate on profitability and liquidity of bank.
3. Two dependent variable i.e. ROE and ROA has been used as a
measure for profitability and while using other variable.
 Other variable such as Liquidity Coverage Ratio, Gross Profit Margin
Ration, and Operating Profit Margin Ration etc. will not be included in
the research. However, theres limitation to all forms of research
because it is impossible to control all variables.

1.6 Organization of the Study

The study has been classified into five chapters
Chapter-I: Introduction
This chapter includes the introduction part of the study, which deals
with the background of the study, statement of problem, Objectives of
the study, significant of the study, limitations of the study and
Organization of the study.
Chapter-II: Review of Literature
This is second chapter which includes review of available relevant
studies, data and information that includes the conceptual review of
the related books, journals, articles and the published and unpublished
research report as well as thesis report.
Chapter-III: Research Methodology
It describes research methods which are carried out for the studies. It
includes research design, sources of data, population and sample and
method of analysis.
Chapter-IV: Presentation and Analysis of Data
This chapter is the major part of the whole study in which all collected
relevant data are analyzed and interpreted by the help of different
financial and statistical tools. This chapter explains the major findings
of the study as well.
Chapter-V: Summary Conclusion and Recommendation
 This chapter summarize the overall picture of the study. It contains
conclusion recommendation and suggestions on the findings of the
study.

1.7 Literature Review

Liquidity and profitability are the two main purpose of working capital
management (WCM) and relates to the matching of assets and
movements ever time (pass and pike 1984 cited in Lamberg and
Valming, 2009). Profitability of the bank determines its ability to
increase capital (through retained earnings), support the future growth
of the assets, absorb loan losses and provide return to investors. The
largest sources of income for banks is net growth, interest revenue
which is calculated by taking interest revenue from lending activities
minus interest paid on deposits and debt. The second essential sources
of bank income is from investing activities, foreign exchange, precious
metal trading, commissions and transaction fees and trust operation
are also substantial sources of income.

The key financial ratios that are used in assessing the profitability of a
bank include: Net Interest Margin (NIM), Return on Assets (ROA),
Return on Equity (ROE), Operating Profit Margin and Non-interest
Income to Assets Ratio (Credit and Financial Risk Analysis, 2012).
On the other hand, for books liquidity refers to reserves of cash,
securities, banks ability to conduct an assets into cash, and unused
bank lines of credit. Liquidity must be adequate to meet all maturing
unsecured debt obligations due within a one year time horizon. Despite
different approached that can be used to analyze banks liquidity. The
following are the key ratios that can be examine banks liquidity:
I. Loans as a percentage of Deposits (LDR)
II. Liquid Assets by Total Deposits (LADR)- calculated by dividing
liquid assets by total deposits and measures deposits matching
to investment and whether they could be converted quickly to
cover redemptions (Credit and Finance Risk Analysis, 2012).
The general claim in literature center around liquidity and profitability
trade of hypothesis which posit that these two financial terms pose
conflicting ends to an organization hence a pursuit of one will mean a
trade off the other (Dash and Hanuman, 2008). However, the other
side of thinking holds that managers can pursue both liquidity and
profitability goals as these two objective have a direct relationship.
These two viewed were observed by chakiaforty (2008) when
evaluating the relationship between working capital and profitability of
Indian pharmaceutical companies. He paint out that there were two
distinct is not a factor of improving profitability and there may be a
negative relationship between them. Secondly, that investment in
working capital plays vital role to improve corporate profitability. There
is a minimum level of investment of working capital, output and sales
cannot be maintained.
Its common to find reference to the fact that it is desirable to
keep the company liquidity ratio higher than 1.00. That would prove
the firm ability to repay short-term commitments, with the liquidation
of short term assets. Any ratio below 1.0 may mean that the business
may not be generating cash enough to meet the short term obligations
(Morrel, 2007). However as Matara (2003) had stressed, if an analysis
is observing a companys balance sheet and face a liquidity ratio of
less than 1.00 he shall not, principal, consider at to be unable to pay
its debts on time. The liquidity ratio would according to the author,
most appropriately be interpreted as an indicators of the degree of
independence of the company against creditors and its ability to face
crises and unexpected difficulties.

Expenses to sales ratio and inventory turnover ratio, Karduman at all

(2010) deals with relationship with working capital management and
profitability. His study focus on ROA as a measure of profitability, and
maturity of accounts receivable, maturity of accounts payable,
inventory and cash conversion cycle(CCC) as measures of working
capital management. Correlation and regression analysis show that the
variables are positively correlated. Deloof, (2003) conducts study
containing over Sovo Belgian companies during 1992-1996 to
determine the effect of working capital management on profit margin
of companies and suggests that companies are able to entrance
shareholders value by maintaining optional balance between current
assets and current liabilities.
The rave loan many researches on the determinants of bank
profitability and almost all find liquidity to be one of the determinants
of bank profitability. According to Eichengrean and G C Bron (2001), the
fever 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.

2. Research Methodology
The analysis of the principles of method, rules, and postulates
employed by a discipline. The systematic study of methods that we
can be or have been applied within a discipline. The study or
description of methods is known as Research Methodology.

2.1 Research Design

It is the set of methods and procedures and used in collecting and
analyzing measures of the variables specified in the research problem
or research study. Different variable are used to measure the
profitability and liquidity return on assets, return on equity, net interest
margin, loan to deposit ratio and liquid assets to deposit ratio are
calculated to show the report of the study.
2.2 Population and Samples
Population of this study is one of the commercial bank of Nepal. This
study focused on the liquidity and profitability policy of Himalayan
bank limited is taken as a sample for the study.
2.3 Sources of Data and Collection Procedures
Data was mainly collected from secondary sources. Data emanated
from published and unpublished books, scholarly, journals, business
and financial newspaper and other magazines and corporate journals.
Financial reports and other relevant information retrieved from the
internet, by search engines.
2.4 Data Analysis and Techniques
Quantitative analysis techniques were adopted for the study. These
included profitability and liquidity ratios analysis. The correlation
logicians and coefficients of determination were identified to describe
the strength of the relationship. For the purpose of the regression, the
profitability measure was ROA (return on Assets) profit after tax over
Total Assets. The liquidity measures used was temporary invested Ratio
(TIA) cash and cash equivalents over Total Assets.
 Reference
Karnduman, H. A. Akbas, H.E, OZSOZGUN, A. Salih, D, 2010.
Effects of working capital Management on profitability:
The case for selected companies in the Istanbul stock exchange (2005-
2008). International journal of Economics and Finance and Accounting.

Lartey, v.c, Antur, S and Boardi, E. K. (2013). The relationship between

liquidity and profitability of listed banks in Ghana International Journal
of Business and Social Sciences,

Research Journal of Finance and Accounting

ISSAN 2222-1697 (PAPER) ISSN 2222-2847
(ONLINE) Vo16, N07, 2015

Matarazzo, d. c (2003). Analysis Financier de Balances

Sao Paulo: Atlas, 2003

Morel, P. S (2009). Airline Finance Burlington:

Ashgate Publishipg Company.