Abstract:
Liquidity management is a critical determinant of financial stability in the banking sector, particularly
in the context of economic volatility and external shocks. This study examines the liquidity
management practices and financial stability in Srilankan, using data from domestic Licensed
Commercial Banks (LCBs),The study employs correlation and regression analyses to assess the
relationship between liquidity management and financial performance metrics, including Return on
Assets (ROA) and Return on Equity (ROE). The findings reveal a complex relationship between
liquidity and profitability, with higher NPLs unexpectedly associated with increased returns,
warranting further investigation. The regression models, however, show low explanatory power,
indicating that traditional liquidity metrics may not sufficiently predict bank performance in the Sri
Lankan context. The study underscores the need for banks to adopt dynamic liquidity management
strategies that go beyond regulatory compliance to enhance resilience against economic instability.
Policymakers and bank managers are urged to refine liquidity frameworks to safeguard financial
stability, particularly in light of rising liquidity pressures and NPLs exacerbated by the COVID-19
pandemic and the 2022 economic crisis.
