Abstract

This study assesses the impact of liquidity risk on bank profitability, focusing on ECOBANK in Buea, Cameroon. Liquidity risk refers to the potential for a bank to be unable to meet its short-term financial obligations due to a lack of liquid assets. Managing liquidity risk is crucial for banks, as a failure to do so can result in financial instability and reduced profitability. The research aims to analyze how liquidity risk affects the profitability of ECOBANK Buea and provide insights into the effectiveness of its risk management strategies.

The study adopts a mixed-methods approach, combining both qualitative and quantitative data. Financial records of ECOBANK Buea are analyzed to identify trends in liquidity and profitability over the past five years. Interviews with bank management and staff provide qualitative insights into the bank’s liquidity management practices and the challenges faced in maintaining an optimal liquidity position.

The findings reveal that liquidity risk has a significant impact on ECOBANK Buea’s profitability. Periods of high liquidity risk correspond to lower profitability due to increased costs of acquiring short-term funds and lost investment opportunities. The study also identifies that inadequate liquidity management can lead to a decrease in customer confidence, further affecting the bank’s financial performance. However, effective liquidity management strategies, including maintaining a diversified portfolio of liquid assets and access to reliable credit facilities, help mitigate the negative effects of liquidity risk on profitability.

The research concludes that liquidity risk is a key determinant of bank profitability in ECOBANK Buea. The bank’s ability to manage its liquidity risk efficiently directly influences its financial stability and profitability. It recommends that ECOBANK Buea enhance its liquidity management by adopting more robust risk assessment models, improving cash flow forecasting, and ensuring compliance with regulatory liquidity requirements. By doing so, the bank can minimize the adverse effects of liquidity risk and enhance its profitability in a competitive banking environment.

Keywords: Liquidity risk, Bank profitability, ECOBANK, Buea, Cameroon, Financial stability, Risk management, Cash flow, Regulatory compliance.