The Effect of Liquidity on the Profitability of Commercial Banks of Afghanistan

Ehsan Ul Haq Haqmal
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Ehsan Ul Haq Haqmal: Dean and Lecturer Faculty of Economics, Tabesh University, Jalalabad, Afghanistan

Tabesh International Journal of Social Sciences (TIJSS), 2025, vol. 01, issue 01

Abstract: This study investigates the effect of liquidity on the profitability of commercial banks in Afghanistan, focusing on how liquidity management influences financial performance in a fragile and developing banking environment. The Afghan banking sector operates under conditions of limited capital market development, regulatory constraints, and fluctuating depositor confidence, making effective liquidity management essential for financial stability and sustainable profitability. The study employs a quantitative research design, utilizing secondary data from the audited annual reports of six commercial banks for the period 2019–2023. Liquidity is measured using the current ratio and acid-test (quick) ratio, while profitability is represented by return on assets (ROA). Leverage indicators (debt-to-assets and debt-to-equity ratios) and taxation are included as control variables, and multiple regression analysis is applied. The empirical results reveal that the current ratio has a negative and statistically significant impact on profitability, indicating that excessive investment in liquid assets may reduce banks’ earning capacity. Conversely, the acid-test ratio exhibits a positive and significant relationship with ROA, suggesting that efficient liquidity management enhances profitability. The findings further show that moderate leverage positively contributes to bank performance, whereas excessive debt does not significantly improve profitability, and taxation is also significantly associated with profitability. Overall, the results support the liquidity–profitability trade-off theory and emphasis the importance of maintaining optimal liquidity levels, contributing to the limited empirical literature on the Afghan banking sector and offering practical insights for bank managers, policymakers, and regulators in emerging and post-conflict economies.

Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:ris:tijssc:022647

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