The dynamics of liquidity-profitability nexus: evidence from Morocco's commercial banks

Abstract

Abstract

Liquidity management is a central issue for banks because maintaining sufficient liquidity strengthens financial resilience, while excessive liquidity holdings may reduce profitability by limiting the allocation of resources to higher-yielding assets. This study examines the relationship between bank liquidity and financial performance in Morocco, with particular emphasis on the trade-off between liquidity and profitability. The empirical analysis covers six Moroccan commercial banks listed on the Casablanca Stock Exchange over the period 2004–2022. Using annual bank-level and macroeconomic data, the study adopts a quantitative panel-data approach based on a fixed-effects model with Driscoll and Kraay standard errors. This methodological approach allows the analysis to account for unobserved time-invariant bank heterogeneity while providing robust inference in the presence of heteroskedasticity, serial correlation, and cross-sectional dependence. Bank profitability is measured by return on assets (ROA) and return on equity (ROE), while liquidity is captured through three indicators: liquid assets to total assets (L1), loans to deposits (L2), and liquid assets to deposits (L3). The results indicate that L1 has a negative and statistically significant effect on both ROA and ROE, whereas L2 does not exhibit a statistically significant effect. The effect of L3 varies across model specifications. Furthermore, bank size, market concentration, and the interbank rate significantly affect ROA, while their effects on ROE are generally not statistically significant. Overall, the findings highlight the existence of a liquidity–profitability trade-off and suggest that Moroccan banks need to balance adequate liquidity buffers with efficient allocation of financial resources.

Keywords: Bank performance, liquidity management, financial stability, fixed-effects model