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Theories Of Liquidity Theory

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c. Theories of Liquidity Management
There are a number of liquidity management theories, the commonly identified ones are as follows:
i. Liquidity Management Preference Theory
This theory was put forward by John Maynard Keynes. Liquidity preference refers to the amount of money the public is willing to hold given the interest rate. Keynes argued that there are three reasons for holding liquid assets. First, they act as ordinary transactions, second the act as a precaution against a rainy day, and third they are used for speculative purposes. Keynes showed that transaction deposits vary inversely with the rate of interest. The main argument in this theory is that at very low interest rate, an increase in the money supply does not encourage …show more content…

The main results of the study demonstrate that each ratio (variable) has a significant effect on the financial positions of enterprises with differing amounts and that along with the liquidity ratios in the first place. Profitability ratios also play an important role in the financial positions of enterprises.

Arif (2012) tested liquidity risk factors and assessed their impact on (22) of Pakistani banks during the period (2004-2009). Findings of the study indicate that there is a significant impact of liquidity risk factors on the banks profitability, where an increase in deposits lead to increasing in the bank’s profitability in terms of reducing dependence on the central bank in meeting the customers’ obligations, and profitability is negatively affected by the allocation of non-performing loans and liquidity gap.

Agbada and Osuji (2013) examined empirically the effect of efficient liquidity management on banking performance in Nigeria. Findings from the empirical analysis were quite robust and clearly indicate that there is significant relationship between efficient liquidity management and banking performance and that efficient liquidity management enhance the soundness of …show more content…

The study shows that there is a statistically significant positive correlation between the degree of capital adequacy in commercial banks and the factors of liquidity risk, and the return on assets, and there is an inverse relationship not statistically significant between the degree of capital adequacy in commercial banks and factors of the capital risk, credit risk, and the rate of force-

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