Discuss the relationship between liquidity and profitability of a commercial bank.

Profitability is the ability of a business to generate earnings as compared to its expenses and other relevant costs incurred for the period. For a firm to continue existing as a going concern, it will largely depend on its ability to generate profit or even attract equity capital and additional investors.

 Profitability means the ability to generate profit from all the business activities of an enterprise, firm, company, or organization. In banks, profitability is termed as the ability to generate revenue over costs, about the capital base.

 Liquidity is necessary in obtaining financial performance, maintaining and improving the market share of an entity.

·        There is an inverse relationship between profitability and liquidity. The higher the liquidity the lower will be the profitability and vice versa. Liquidity and profitability are competing goals for the Finance Manager.

·        By increasing profitability, there is the probability of reducing a firm's liquidity and an extensive interest on liquidity would tend to affect the profitability. A firm will not be able to fulfill its immediate obligations when it is making low profits due to the high liquidity that it gains. This will mean that funds are held in non-liquid assets and cannot be used for productive activities, hence lowering the profitability.

·        Financial expert indicates that a dilemma in liquidity management is finding a balance between liquidity and profitability since these two are inversely associated, and thus profits diminish with an increase in liquidity and vice versa.

 Moreover, holding liquid assets could improve a bank's profitability since this affects banks' profitability.