INFLUENCE OF BANKING SECTOR LIQUIDITY ON FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN RWANDA

The link between banking development and economic growth has long received significant attention in research, however, the waves of banking development cannot raise the tide of the economy without affecting financial performance of commercial banks; it is against this background that this study was formulated with the objective of determining the influence of banking sector liquidity on financial performance of commercial banks in Rwanda. In this paper banking sector liquidity is proxied by Bank Deposits, Financial performance proxied by Return on Assets (ROA), Return on Equity (ROE) and Net Interest Margin (NIM) and both moderated by inflation proxied by consumer price index. This study was purely based on secondary data, multiple linear regression model was used to determine such influence between these two valuables. The study concluded that banking sector liquidity measured by bank deposits has a positive and significant influence on profitability measured by ROA and ROE but a negative significant influence on Cost of operation measured by NIM. It therefore means that banking sector liquidity influences profitability but does not influence the commercial banks cost of intermediation in Rwanda. For commercial banks in Rwanda to improve their profitability, they should put in place measures to encourage bank deposits for example higher interest rates to attract depositors. However to reduce the cost of intermediation, the study recommends that commercial banks in Rwanda need to reduce problem assets as high nonperforming loans dampen banks’ potential lending capacity and, by extension, their ability to build up capital buffers. This study further recommends that commercial banks should do a lot of their own awareness, sensitization, education and training to increase the use of other financial innovations like ATM’s, agency banking, internet banking and the use of credit cards to further promote mobilization of savings.