Liquidity indicators and their relationship to the financial performance of banks: an analytical study of a sample of Iraqi banks for the period (2014-2023)

Abstract

The current research aims to study liquidity indicators, namely (current ratio, employment ratio, and legal reserve ratio), and their relationship with financial performance. The following financial performance indicators were utilized: (net profit margin, return on assets, and return on equity). The research also explores the concept of liquidity and its indicators, the concept of financial performance and its indicators, and the use of profitability as a measure to assess financial performance. The descriptive approach was employed to analyze the financial data of Iraqi banks listed on the Iraq Stock Exchange during the period (2014-2023), specifically for Bank of Baghdad and Middle East Bank. The results revealed a relationship between liquidity indicators and financial performance. The availability of liquidity supports financial performance, while a decline in liquidity exerts pressure on profitability. Middle East Bank outperformed in terms of current and employment ratios and maintaining a legal cash reserve to mitigate liquidity risks, compared to Bank of Baghdad, which maintains a lower cash reserve. This exposes Bank of Baghdad to liquidity risks, such as the potential withdrawal of deposits by clients. In contrast, Middle East Bank's adequate cash reserve protects it from such risks.

However, Bank of Baghdad excelled in profitability metrics, achieving higher (net profit margin, return on assets, and return on equity) ratios. This indicates that Bank of Baghdad is more efficient in managing its assets compared to Middle East Bank.