The relationship between liquidity risk and return on assets in Yemeni banks using panel data models for the period (2004 - 2020)

Abstract

This study aims to identify the optimal model for representing the relationship between liquidity risk (measured by the liquid assets to total assets ratio (LTA)), the loans-to-deposits ratio (LDR), and return on assets (measured by net income to total assets (ROA)) in Yemeni banks, utilizing panel data models. To achieve this objective, the study employed balanced financial data for the period 2004–2020. Based on the panel diagnostic tests, the study adopted the random effects model, estimated using the generalized least squares regression method (GLSR). The findings indicate that liquidity risk, as measured by the liquid assets to total assets ratio (LTA), does not affect the return on assets (ROA). However, liquidity risk measured by the loans-to-deposits ratio (LDR) negatively impacts the return on assets (ROA). Accordingly, the study recommends restructuring the banks' liquidity management policies, emphasizing the allocation of liquid assets into diversified investment portfolios and innovative banking products tailored to the local business environment, rather than retaining them unproductively or concentrating them in low-yield debt instruments. Additionally, it highlights the necessity of developing effective mechanisms for the early assessment and diagnosis of credit risk and establishing flexible plans that balance financial safety with investment returns. Finally, the study underscores the importance of coordinating with regulatory bodies to harmonize monetary policies and engaging in negotiations with international entities to ease restrictions and sanctions on banking transactions.