Determinants of Bank Liquidity: Empirical Evidence on Ethiopian Commercial Banks

Abstract

Liquidity management is considered as one of the top priorities in banks to ensure their ability to reach funds when needed in order to meet their customers' demands and meet their obligations at time. Therefore, this study aims to identify determinants of liquidity for commercial banks in Ethiopia. In order to achieve this aim, banks’ balance sheets and income statements was analyzed in order to compute study variables. Liquidity, which is the dependent variable of study, expressed by two liquidity ratios as: liquid assets to total deposit (L1), and loans to deposits (L2).Therefore, the purpose of this research was to identify the factors determine Ethiopian commercial banks liquidity. The study has categorized the independent factors into bank specific factors and macro-economic factors. The bank specific factors include management efficiency, deposit, Bank Size, Capital adequacy, Profitability, asset quality, and loan growth. While, the macroeconomic factors include short term interest rate, interest rate spread, interest rate, Gross Domestic Product (GDP), general inflation and unemployment rate. The panel data was used for the sample of nine commercial banks in Ethiopia from 2007 to 2017 year and estimated using Fixed Effect Model (FEM), data was present by using descriptive statistics and the balanced correlation and regression analysis for liquidity ratios was conducted. The findings of the study show that, asset quality, GDP, and loan growth had statistically significant and negative relationship with banks’ liquidity. profit and unemployment rate had statically positive significant impact on liquidity measured by variable L1.whereas interest rate spread and bank size had statically negative significant impact on L1 On the other hand capital adequacy had statistically significant and positive relationship with banks’ liquidity measured by variable L2. While, inflation rate, and management efficiency had no statistically effect on bank liquidity. The study generally stresses the importance of internal management of liquidity risk of banks on a continuous basis, and specifically recommends balancing the bank's deposit taking and lending structure on the one hand and maintaining liquidity on the other. It also recommends to strengthening banks capital structure and control over operating expenses. Moreover, banks in Ethiopia should not only be concerned about internal structures and policies, but they must consider both the government regulation and the macroeconomic environment together in developing strategies to improve the liquidity position of the banks.

Keywords: Liquidity, Commercial banks, assets, loan

DOI: 10.7176/RJFA/13-11-03

Publication date:June 30^th 2022