CHAPTER 1

1.1 Introduction:

This chapter one is explaining the background of study after that highlight the research problem
or gap .in addition ,this will explain the question of research and then defines the objective of the
study. In last it will conclude with the scope of study and with the significance of study.

1.2 Background :

Now a days major source of financing for most of businesses is banking sector. The liquidity
risk is highly concerned risk of commercial banks in everywhere. Liquidity is return from
disparity either it can be excess of or deficiency of cash .liquidity Risk also acquire cash at
logical cost form complexities(Akhtar, Ali & Sadaqat, 2011).liquidity is the banks capability to
payout its short term obligation ,withdrawals with its liquid assets. There are many reason
through which banks maintain liquid balances.

Liquidity of banks is in which banks efficiently finance its transactions, in case if bank is fail to
meet it so that is known as the liquidity risk. In such a way banks are supposed unable to pay off
their obligation including debt maturity, deposits withdrawal and investments(Malik & Rafique,
2013). To meet short term obligation its importance for banks to hold cash and balanced liquidity
to ensure effectiveness and profitability of banks. There are many properties through which
banks achieve the maximum level of liquidity such as nature and level of
complexity ,characteristics and size of banks

Banks for international settlements define liquidity in a way which banks without any loss fulfill
its obligation and meets the increased in Assets(BIS 2008). The satisfaction in liquidity is
important for All banks because if any one bank face liquidity crisis so this will effect the whole
banking system and also increase the systemic Risk. In order to manage risk of liquidity banks
follow the decisional structure which use best method for funding, the exposure limits and in
case of need set changing rules for liquidity(Greuning and Bratonovic,2004).The reputation of
banks also effect along with the performance because of the liquidity risk (Jenkinson, 2008). The
reputation of banks reduce in case if banks not provide fund within time and lose its customer or
depositor trust on banks, so that regulator charge penalty on this weak condition.

In this modern era of banks liquidity risk is major issue and challenge .Risk management
structure and funding is changed due to wide variety of funding products in market ,more
competition of deposit and with the advancement in technology(Akhtar,2007).In financial market
its importance for banks to create liquidity. New banks requirement are introduced by Basel 3 on
the liquidity risk which is effective for banks because higher level of liquidity is required to hold
than the past, and this will Also effect the banks function of creation of liquidity(Horvàt, Seidler,
& Weill, 2012).

These are some factor which is used to assess the liquidity risk of banking sector including size
of bank which is independent variable and finds through logarithm of total assets and there is
negative effect of the bank size on the probability. Banks of large size get benefit from fail
policy and believe that these are more survivor than other small size banks(Aladwan,2015).

capital adequacy ratio measure through the tier one which include equity and retain earning ,tier
two which include revalued reserves and security to the weighted of total risky assets. In order to
know the strength, resilience and stability with the degree of losses banks use capital adequacy
ratio. The banks having high ratio of capital adequacy is known as the safe and its able to pay its
obligation. NPL is part of total loans and it is not good for the performance of banks. The is
provided in the profit loss statements. ROA is used to know how to measure income form the
Assets of banks and it is use to compare banks performance. loan to deposit is the ratio of loan
to deposit which measure the reliance of banks on the deposits funding. Loan to deposit ratio
compares the banks loan with the banks deposit in order to measure the bank liquidity, and low
ratio is good for bank if its high ratio which mean banks are unable to meets or cover fund needs.

1.3 Research Gap:

There are few research work on liquidity risk in the banking sector of the developing country
Pakistan . the research work that is already done is related to liquidity comparison of Islamic
banking and conventional banking of Pakistan. this study will focus on the significance and
impact of few factor such as size of bank, loan to deposit, ROA Capital adequacy ratio and the
non-performing loan on the liquidity of conventional banks of Pakistan.
1.4 Problem statement:

The Major issue of Banking sector of Pakistan is liquidity risk which banks unable to meets its
obligation.so its necessary to develop the impact of size of assets, capital adequacy ,LDR, Non-
performing loan, and ROA on the liquidity risk, in order to reduce the liquidity risk for banks. on
the other hand, only few research done related to liquidity risk of banking sector of
Pakistan .therefore ,this research is conducted to know the relation among size of bank, capital
Adequacy, loan to deposit, non-performing loan, Return on asset and Liquidity risk.

1.5 Research Questions:

Research question are followings:

I. What impact does size of bank have on the Liquidity risk of banks in Pakistan?
II. What impact does Capital adequacy have on the Liquidity risk of banks in Pakistan?
III. What impact does Non performing loans have on the Liquidity risk of banks in Pakistan?
IV. What impact does loan to deposit have on the Liquidity risk of banks in Pakistan?
V. What impact does ROA have on the Liquidity risk of banks in Pakistan?

1.6 Objective of Study:

Objective of study are followings:

 To find out the impact of size of bank on the liquidity risk of conventional banks in
Pakistan.
 To investigate the impact of Capital adequacy on the Liquidity risk of conventional
banks in Pakistan.
 To measure the impact of Nonperforming loans on the Liquidity risk of conventional
banks in Pakistan.
 To assess the impact of loan to deposit on the Liquidity risk conventional banks in
Pakistan.
 To identify the impact of Return on Asset on the Liquidity risk of conventional banks in
Pakistan.
1.7 significance of study:

This study has focused on the liquidity risk factors such as size of bank which refers to the total
number of assets a bank holds, loan to deposit which means the difference between the total loan
and total deposits, ROA capital adequacy ratio and the non-performing loan on the liquidity of
conventional banks of Pakistan. This study will be helpful for the banking sectors in the field of
investment, transactions. This study will helpful in the reduction of liquidity risk of banks which
will increase or maintain the reputation of banks and will help in examining the reliance on the
loans and deposits . This will also help to bank to know their stability, strength and resilience
withstand degree of losses.

1.8 Scope of Study:

The main purpose of this study is to focus on the significance and impact of size of bank (the
total number of assets the bank holds) , loan to deposit (the difference between the total loan and
total deposits) , ROA capital adequacy ratio and the non-performing loan on the liquidity of
conventional banks of Pakistan. In the banking sector the liquidity is important aspect for banks
to meet its obligation and for better performance. Hence, this research is to provide the way to
authorities to set and manage future prospects such as for Banks to meets its liquidity risk and
investment decision for investor.

Important:

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