Commercial Banks Liquidity in Pakistan: Firm Specific and Macroeconomic Factors

Achieving the optimum level of liquidity is crucial for every bank. A lot of factors have been examined by number of researchers in this area. This study examines the bank specific and macroeconomic determinants of commercial bank’s liquidity in Pakistan. The sample of the study consists of 26 Pakistani commercial banks. The study period consists of 5 years [2007 to 2011] which also covers the period of the Asian financial crisis 2008. Bank’s liquidity is measured in two ways; one is cash and cash equivalents to total assets (L1) and second is advances net of provisions to total assets (L2). Two models are estimated based on these measures of liquidity. The results of model 1 (L1) indicate that the bank specific fundamentals (NPL and TOA) and monetary policy interest rate positively determine the bank liquidity whereas inflation has a negative impact. Bank liquidity measured by L1 is negatively and significantly affected by the financial crisis. The results of model 2 (L2) indicate that the bank size and monetary policy interest rate positively and significantly determine the bank liquidity.Additionally there is a positive and significant impact of financial crisis on the liquidity of commercial banks measured by L2.