Effect of liquidity management on the financial performance of commercial banks (Case study: Selected commercial banks of Afghanistan from 2014-2020)

This study examines the relationship between liquidity management and the financial performance of Afghan commercial banks, with a special focus on the years 2014–2020. Cash Ratio (cash to current liabilities), Operating Cash Flow Ratio (OCFR), Trend Cash Deposits (TCD), Leverage (L), Revenue Growth (RG), Capital Intensity (CI), Net Working Capital to Total Assets (NWC/TA) and Liquidity Coverage Ratio (LCR) are the eight main independent variables that are examined in this study in order to determine how they affect the dependent variable, Return on Assets (ROA). The study examines the relationship between these liquidity and financial variables in an unstable political and economic environment using panel data regression analysis (Pooled OLS) on a sample of ten Afghan commercial banks. According to the findings, there is a statistically significant increase in bank profits (ROA) as revenue (Revenue Growth as RG) rises. However, the Liquidity Coverage Ratio (LCR) and the Cash Ratio, two popular indicators of available cash, do not significantly correlate with profitability; thus, having too much cash on hand may actually lower potential profits. In Afghanistan's fragile financial environment, the banks' personal decisions seem to be more important than wider economic considerations, and using more borrowed money (Leverage) somewhat reduces profitability. This study offers three main conclusions about banking operations in unstable environments like Afghanistan. First, increasing income is a better way to boost profitability than keeping large cash reserves. Second, as excessive liquidity reduces earnings, Basel III's international banking regulations need to be revised. Third, in times of uncertainty, banks should take strategic actions, including diversifying their sources of income beyond lending, keeping a sufficient amount of regulatory capital, and putting strong risk management systems in place. These findings are useful in practical applications because they help scholars analyze banking difficulties in unstable situations, help bank managers maximize profitability, and help policymakers improve regulations. The banking industry in Afghanistan serves as an excellent example of how to achieve a balance between maintaining liquidity and making a profit in fragile financial systems, offering more general guidance to economies that are similarly unpredictable. Keywords: Liquidity Management, Bank Profitability, Commercial Banks, Afghanistan Banking System, Return on Assets (ROA), Basel III Framework, Revenue Growth, Financial Leverage, Capital Intensity