Impact of Liquidity Management on Financial Performance of Commercial Banks: Evidence from Zambia

Abstract

Liquidity management is a critical determinant of financial stability and performance in the banking sector, particularly in emerging economies characterised by macroeconomic volatility and evolving regulatory frameworks. This study examines the relationship between liquidity management and financial performance of commercial banks in Zambia using panel data spanning the period 2019-2023. A quantitative research design is adopted, incorporating financial ratio analysis, trend analysis, and Karl Pearson’s coefficient of correlation to assess the relationship between liquidity indicators and profitability measures.
The study evaluates three anonymised bank tiers. The Large Tier A Bank, Tier B Bank, and Tier C Bank classified based on market positioning and supervisory segmentation principles. The findings reveal a strong and statistically significant positive relationship between liquidity and financial performance across all bank tiers, with correlation coefficients of 0.94, 0.78, and 0.99 respectively. The coefficient of determination indicates that liquidity explains up to 98 percent of profitability variation in smaller banks.
However, the results also confirm the existence of a liquidity profitability trade-off, where excessive liquidity holdings reduce earnings due to underutilised funds. While a regression framework is specified, the empirical analysis primarily relies on correlation techniques; therefore, the findings should be interpreted as indicative of association rather than strict causality. The study contributes to the limited empirical literature in emerging economies by introducing a tier-based liquidity performance framework and provides policy-relevant recommendations for regulators and financial institutions.