The Impact of liquidity on Bank profitability – Evidence from Zimbabwe and South Africa Commercial Banks

Abstract

This study examines the impact of liquidity and macroeconomic factors on bank profitability in South Africa and Zimbabwe, focusing on the distinct economic and regulatory environments in these countries. Liquidity is a vital component of banking, ensuring banks meet short-term obligations while maintaining financial stability. The study examines the relationship between liquidity and profitability, considering both internal bank-specific factors and broader macroeconomic conditions. Global research on this relationship presents mixed findings, with some studies showing a positive correlation, while others suggest an insignificant or negative effect. This research contributes empirical evidence from these two Southern African countries—Zimbabwe, marked by economic instability and hyperinflation, and South Africa, characterized by a more stable banking system. The study uses secondary data from 12 commercial banks in both countries, covering the period from 2012 to 2022. It applies fixed-effects regression models to analyse data on bank liquidity, size, asset quality, cost management, market structure, economic growth and inflation. The findings indicate that liquidity does not significantly influence profitability in either country, likely due to regulatory requirements ensuring adequate liquidity levels across banks. In contrast, the study reveals a negative relationship between economic growth and profitability, suggesting that during economic expansions, banks lower lending rates to capture market share, reducing profit margins. Inflation was identified as having no significant impact on profitability, possibly due to effective inflation risk management strategies employed by the banks. The study concludes that banks in both countries should focus on improving operational efficiency, capital adequacy, and cost management rather than prioritizing liquidity levels for profit maximization. It also recommends that banks adjust their business strategies in response to economic growth cycles to mitigate associated risks. Despite inflation's minimal impact, the research advises banks to maintain strong inflation risk management practices. The study provides valuable insights for policymakers, bank managers, and researchers looking to understand the dynamics of bank profitability in emerging markets.