Bank liquidity Management and its Impact on Return and Risk: An Applied Study on Banks in Palestine.

Abstract

The study aimed to investigate the impact of banking liquidity measured through its primary indicators (cash liquidity ratio, statutory liquidity ratio, and employment ratio) on return and risk among banks operating in Palestine during the period (2018–2024). To accomplish this objective, the descriptive–analytical approach was adopted, employing multiple regression analysis and panel data techniques for a sample of 12 banks operating in Palestine. The financial data were collected from the published financial statements available on the official websites of the respective banks, using a comprehensive survey method. The STATA statistical software package was utilized to conduct the estimation and analysis of financial data in order to answer the study’s questions and test its hypotheses. Accordingly, the findings revealed that the indicators of bank liquidity had no statistically significant effect on returns in Palestinian banks, reflecting the limited ability of liquidity to generate high profitability under current banking conditions. However, the results showed a strong and significant relationship between liquidity indicators and banking risks, as increased credit employment was found to heighten credit and interest rate risks, while the legal liquidity ratio contributed to mitigating them. The results also indicated that the control variables namely, bank size, type, and financial leverage had a partial impact on the relationship between liquidity, return, and risk. Overall, the study concluded that liquidity management in Palestinian banks tends to be conservative, focusing on maintaining stability and minimizing risks rather than maximizing profitability, thereby emphasizing the need for a strategic balance between liquidity, profitability, and risk in accordance with Basel III standards. The study recommended enhancing the efficiency of liquidity management by investing cash surpluses in short-term, low-risk financial instruments, and achieving a balanced relationship between liquidity, profitability, and risk in line with Basel III requirements. It also recommended developing flexible regulatory policies that consider the specific characteristics of Palestinian banks and foster cooperation among them to strengthen financial stability. In addition, the study suggested conducting future research addressing other factors influencing return and risk, such as asset quality, capital structure, and financial innovation within the Palestinian banking sector.