Liquidity-Profitability Trade-off in Commercial Banks: Evidence from Tanzania

Abstract

This paper examines the relationship between banks’ profitability and liquidity by using three different models. It is a longitudinal study whereby five banks from Tanzania were taken into consideration for the time period from year 2006 to 2013. By using Hausman test and thereafter fixed effects approach, all the models revealed that there is no statistically significant relationship between banks’ profitability and liquidity. Thus, it can be concluded that the banks can focus on increasing their profitability without affecting their liquidity, and vice versa. However, this is not guaranteed because the situation might change or one might come out with different kind of results if a different sample is used.

Keywords: Liquidity, Profitability, Commercial banks, Tanzania