DETERMINANTS OF LIQUIDITY OF PRIVATE COMMERCIAL BANKS IN ETHIOPIA

Abstract

Liquidity is one of the major concerns for banks and thus achieving the optimum level of liquidity is crucial. The main objective of this study was to identify the determinants of liquidity of private commercial banks in Ethiopia. In order to achieve the research objectives, data was collected from a sample of six private commercial banks in Ethiopia over the period from 2000 to 2015. Bank specific determinants bank size, capital adequacy; deposit growth, market concentration, onperforming loan and National Bank bill were analyzed by using the balanced panel fixed effect regression model. Bank’s liquidity is measured in liquid asset to total asset. The findings of the study revealed that, National Bank bill and non-performing loan has negative and statistically significant impact on liquidity; while market concentration have positive and statistically significant impact on liquidity of Ethiopian private commercial banks. However, bank size, capital adequacy and deposit growth have no statistically significant effect on the liquidly of Ethiopian private commercial banks. The result of the study shows that higher level of market concentration among private commercial banks and due to excessive lending, the possibility of defaulting loans were increased. The study recommends that private commercial banks should plan their loan portfolio to reduce risk and government should control the competition to have more competitive edge in the industry.