Industry Specific and Macroeconomic Determinants of Excess Liquidity of Commercial Banks in Bangladesh

Abstract

Purpose: Persistent increase in excess liquidity of commercial banks has become a major concern for Bangladesh’s economy and it has been considered as a major barrier to achieve expected economic growth in future. The purpose of this study is to assess the banking industry specific and macroeconomic variables which are contributing to excess liquidity. Methodology: Panel data covering five year period from 2012-2016 were analyzed within the framework of random-effect technique. Excess liquidity has been measured by surplus of liquidity over prescribed ratio to total deposits. Capital, Non-performing loan, ROE, and Asset Base have been taken as bank specific and GDP, Call Money Rate, and Inflation have been taken as macroeconomic influencing variables. Findings: Commercial Banks have surplus of liquidity about 0.5 time over their regulatory requirements. Increase of Non-performing loan discourages bankers to disburse loan, which raises excess liquidity. Higher Return-on-equity motivates banks to accumulate fresh liquid fund to enhance loan disbursement capability which also contributes to excess liquidity. Banks with higher asset base have also higher excess liquidity. Higher GDP growth rate demands more fund from banking sector which reduces excess liquidity. Originality: This is the first comprehensive study of its kind in this sector in Bangladesh.