The Impact of Liquidity Management on Bank Financial Performance in a Subdued Economic Environment: A Case of the Zimbabwean Banking Industry

Liquidity is generally referred to as the ability to generate adequate cash to pay off financial obligations but in banking it mainly refers to the ability to honour maturing deposits. Banks indeed require liquidity since such a large proportion of their liabilities are payable on demand (deposits) but typically the more liquid an asset is, the less it yields. Hence, the decision to choose a particular combination of assets over another, taking into consideration the liability size of a bank, would have a massive effect on bank liquidity management, profitability and risk. This paper sought to establish the impact that proper liquidity management has on the financial performance of banks on the backdrop of a poorly performing economy. Factors that include asset liability mix, regulatory and market changes and liquidity management strategies are closely scrutinised in line with the ever changing Zimbabwean economic environment. A mixed research methodology was adopted, where research methodology is based on the multiple viewpoints or perspectives which are brought forward by both qualitative and quantitative research methodologies. The study focused on the population of banking financial institutions in Zimbabwe and drew a sample of five (5) leading banks that comprised of Commercial Bank of Zimbabwe (CBZ), Standard Chartered Bank of Zimbabwe, First Capital Bank, FBC Bank and ZB Bank. The major findings of the study were that there is a strong positive relationship between liquidity management and bank financial performance. Trade-off between liquidity and profitability in Zimbabwean banking institutions has seen a decline in profit margins over the period under study, but has fostered greater stability that has guaranteed better performance and sustainability. However, there is need for a holistic approach to liquidity management by all stakeholders involved in the exercise and as such, recommendations have been forwarded for their consumption.

Keywords: Liquidity management, Asset-Liability exposure, Liquidity contingency plan, Gap analysis, Volatility analysis, Current ratio, Return on Equity.