The impact of liquidity risk on bank financial performance

Ridha Yousfi

MPRA Paper from University Library of Munich, Germany

Abstract: This study investigates how liquidity risk affects the performance of deposit money banks in Tunisia, while also examining the moderating influence of nonperforming loans on this relationship. Using a two-step system generalized method of moments (GMM) estimator, the analysis is conducted on a sample of 50 listed banks across six Tunisian countries—Nigeria, Ghana, South Africa, Zambia, Kenya, and Tanzania. Bank performance is measured through return on assets (ROA) and return on equity (ROE), with net interest margin (NIM) serving as a robustness indicator. The results reveal that liquidity risk has a significant and negative impact on bank performance, indicating that higher liquidity risk reduces profitability. Similarly, nonperforming loans negatively and significantly influence bank performance, and their interaction with liquidity risk further exacerbates this adverse effect. These findings are consistent across alternative performance metrics and econometric models that address potential endogeneity issues. Overall, this study provides one of the earliest cross-country empirical insights into how liquidity risk affects DMB performance in Tunisia and contributes to the literature by integrating the joint effect of liquidity risk and nonperforming loans, thereby highlighting the compounded challenges facing banks in the region.

Keywords: Liquidity risk; GMM; Return on asset; Return on equity (search for similar items in EconPapers)
JEL-codes: G3 G38 (search for similar items in EconPapers)
Date: 2025-03-01, Revised 2025-06-01
New Economics Papers: this item is included in nep-ara
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