Effect of liquidity risk in the profitability of banks: comparison between Dhaka Bank Ltd and the overall industry

Abstract

This report tried to find the relationship between liquidity risk and the profitability of the banks. It is found that liquidity risk affects the profitability of the banking industry but it does not affect the profitability of Dhaka Bank Ltd. Banks have been facing increasingly more demand for loans from the private sector after having excess liquidity for quite a long time since December 2017. A few banks in the industry have exceeded the allowable advance to deposit ratio (ADR) of 85 percent which is a violation of one of the macro-prudential policies of Bangladesh Bank. For this reason, Bangladesh Bank has advised banks to reduce the LDR to 83.5 percent by December 2018. As a result, liquidity risk in the banking sector is increasing. The report also contains an overview on Dhaka Bank Ltd as well as the Back to Back LC payment division of CPC trade department.