Determinants of Banks Liquidity: The Case of Private Banks in Ethiopia

Abstract

The objective of the study was to examine the impacts of both bank specific and macroeconomic factors on banks liquidity of Ethiopian private commercial banks and examine the trends of private banks liquidity. In order to achieve the objectives the researcher used Quantitative research approach and balanced panel data. Fixed effect regression model was used to examine the impacts of independent variables on dependent variables for selected private banks in Ethiopia from 2009-2016. Data was collected from NBE annual report and MOFED. The collected   data was analyzed by using descriptive statistic and inferential analysis. The study used bank size, profitability, capital adequacy; cash reserve ratio, interest rate margin, loan growth rate, nonperforming loan, interest rate on loan, real GDP, inflation rate as independent variables and liquid asset to deposit ratio as a dependent variable. The result of the fixed effect model suggested that cash reserve ratio, profitability, nonperforming loans had positive and significant effect on banks liquidity, while bank size, deposit ratio, loan growth rate and interest rate margin had negative and significant impact on banks liquidity. However, variables like capital adequacy ratio, real GDP and inflation found to be insignificant. The study suggested that, all private commercial banks of Ethiopia should give due attention to bank specific factors by providing effective and well structured policies and procedures.

Keywords:Determinants of banks liquidity, Ethiopian Private commercial banks, Fixed Effect Regression model, and Liquid asset total deposit ratio

DOI: 10.7176/RJFA/10-3-05