Liquidity and bank profitability in WAEMU zone: a panel data analysis

Abstract

This paper examines the impact of liquid assets on bank profitability by using panel data regression through 11 years period (2001 to 2011) for 38 banks in WAEMU. Bank profitability was assessed by both ROE and ROA while liquidity was rated by the share of liquid assets in total assets. Our findings revealed a concave parabolic functional form regarding the relationship between profitability and liquidity by confirming the nonlinear relationship and the assumption that both excess and lack of liquidity may be harmful to banks’ profitability. The robustness was tested by resorting to control variables such as size, age and gearing. This led to the revelation of the adverse effects leverage can have on profitability as opposed to how favourable size could impact it. However, age does not influence bank profitability in WAEMU area. The estimated results also showed that the recent financial crisis has not fundamentally impacted the relationship between profitability and liquidity in the WAEMU