The effect of asset liability management on the liquidity risk of domestic licensed commercial Banks in Sri Lanka

Abstract

This study examined the effects of asset liability management on the liquidity risk of domestic licensed commercial banks in Sri Lanka. For this purpose, 10 domestic licensed commercial banks over time period from 2009 to 2016 were selected due to availability of needed data. The secondary data were collected from the bank’s annual reports for the analyses. The collected data were analysed using statistics such as descriptive statistics, correlation coefficient and regression analysis. The study established that liquidity risk can result into experiencing adverse operational and financial problems such as decline in investor confidence, panic withdrawals and daily operation problems. Hence, banks attempt to control asset liability management factors such as capital adequacy ratio, return on equity, return on assets, loans to deposits ratio and total assets of commercial banks by balancing cash inflows and outflows. According to the results of regression analysis, capital adequacy ratio, return on asset, loan to deposit ratio have significantly positive effect on liquidity risk while size of the bank has a significantly negative effect on liquidity risk. At the same time, there is no significant relationship between return on equity and liquidity risk. Therefore, the findings of the analysis concluded that the asset liability management have an effect on the liquidity risk of Sri Lankan domestic commercial banks.