The Nexus of Bank Liquidity and Profitability: Evidence from Commercial Banks in Ethiopia

Abstract

The study attempted to examine the effect of liquidity on performance of commercial banks in Ethiopia for the period 2004-2016. Liquidity risk is considered as one of the serious concern and challenge for the modern era banks. A bank having good asset quality, strong earnings and sufficient capital may fail if it is not maintaining adequate liquidity. During the recent global financial crisis, several banks experienced some difficulties because they failed to manage liquidity in prudent manner. Thus, the unique feature of the study was inclusion of more liquidity measures and assessment six sampled banks. Both descriptive and explanatory research design is used. Secondary data mainly audited financial statements are used to observe the effect of bank liquidity measures over bank performance. Convenience sampling method is used to select banks in the study. Both descriptive and econometric data analysis tools are applied. The finding of the study reveals that LATD and TLTD were significant at 1% level of significance on bank performance—NIM. These variables have a negative effect on bank performance measure. Except the CR measurement, the remaining explanatory variables hypotheses are rejected on the ground. Based on the findings of the study, banks are advised to be very cautious while disbursing loan and mobilizing liquid assets.