EFFECT OF LIQUIDITY ON PROFITABILITY OF ETHIOPIAN PRIVATE COMMERCIAL BANKS

Abstract

The study sought to find out the effect of liquidity on profitability of all private commercial Banks in Ethiopia through the significant variables explaining liquidity and profitability by secondary data’s gathered from NBE and annual financial reports of the banks. Three variables for liquidity and one variable for profitability were taken to measure liquidity and profitability of commercial banks in Ethiopia, loan to total asset, loan to total deposit, liquid asset to total deposit and return on asset respectively. Unbalanced panel regression model was used for data covered from 1994 -2015. Hetroscedasticity test, auto-correlation tests, multi-collinearity and normality tests were performed to test whether the variables satisfy the assumptions of the research. The regression results showed that all the three variables, loan to total asset, loan to total deposit and liquid asset to total deposit had statistically significant effect on banks profitability. Among these significant variables affecting banks profitability loan to total asset had positive effect whereas, loan to total deposit and liquid asset to total deposit had negative effect on profitability. This implies that liquidity has both significant positive and negative impact on profitability; therefore the study suggests that, management of banks should give an adequate emphasis to these two conflicting goals of banks and maintain optimal level of liquidity to maximize its profit and to enhance the banks competitiveness in the industry.