Investigating The Influence Of Liquidity Risk On Bank’s Financial Performance: Empirical Evidence From The Philippines

Abstract

Liquidity risk is a crucial factor that can impact the performance of banks, particularly in the rural banking sector. This article investigates the influence of liquidity risk on the financial performance of 92 Philippine rural banks from 2018 to 2022. The study employed descriptive data and quantitative methods, including financial ratios, visual binning and Pearson r correlational research design. The data used is secondary data. Liquidity risk is measured using the loan-to-deposit ratio, and financial performance is measured using the return on equity ratio. The empirical analysis revealed that most rural banks in the Philippines maintained a low level of liquidity risk ratio, regarding financial performance, most rural banks experienced low-levels of return on equity. A low ratio may indicate underutilization of deposits for lending, potentially leading to lower profits, consequently low return on equity can hinder a bank’s ability to sustain profitability, attract investors and retain capital, potentially indicating operational inefficiencies or conservative lending practices. The study used asset-liability management and liquidity preference theory frameworks, which provide a theoretical lens to understand the dynamics between liquidity risk and a bank's financial performance. Furthermore, the findings suggest no significant relationship between liquidity risk and bank performance, indicating that liquidity risk may not be a primary driver of financial outcomes for these institutions. The results of this study elucidate the intricate relationship between risk and performance in the rural banking sector, which can inform policy and strategic decisions to enhance the financial stability and viability of these critical community-based financial institutions.