A Starting Point for Researchers to understand the relationship between Liquidity and the Profitability of Banks

Investment function of financial management plays an important role as it identifies a very critical aspect of Liquidity Management. A trade off exists between Liquidity and Profitability wherein if one component is increased the other gets decreased. Hence the firms always strive for optimal investment so that the liquidity profitability trade-off is capitalized. Therefore the study aims to analyse the impact of liquidity on the profitability of Banks. As financial intermediary, banks contribute to the stability of the financial system as it plays an important role in supporting economic acceleration by converting deposits into productive investments and a sound and profitable banking sector is better able to withstand negative shocks. The study covers several research papers that helped the researcher to understand the relationship between liquidity and profitability of Banks. Moreover the study provides management with appropriate recommendations while taking liquidity decisions.