Assessment of Liquidity Risk Management Practices & Challenges (The Case of Private Commercial Banks in Ethiopia)

Abstract

The main purpose of the study was to assess the liquidity risk management practices and challenges of Private commercial banks in Ethiopia. To deal with the problem, fundamental research questions were formulated weather banks are managed liquidity risk in accordance with the Basel Principles or not. Moreover, liquidity risk exposures of each banks performance were reviewed during the study. To conduct the study, descriptive method was employed. Purposive sampling was used in the selection of each bank and the respondents from the respective bank. Thus, a total of 30 respondents participated to the sources of primary data for the study. Data were collected through questionnaire and annual reports of each commercial bank. The data collected from primary and secondary sources were organized using tables and graphs and interpretation was made on the data using quantitative and qualitative methods. The findings of the study revealed that the liquidity risk management practice of private commercial banks in Ethiopia is somewhat partially fulfilled comparing against best principles of Basel. There are no standardized and centralized liquidity risk management practices which can able to address the basic principles for managing liquidity risk. The main challenges most of the private banks faced as per this study are NBE bill purchase policy imposed on private commercial banks, financial innovation and global market development and the increasing real time nature of payment and settlement system. Moreover, all private commercial banks liquidity position has been deteriorated from year to year and banks should work hard to overcome the problem. Finally, it is recommended that Banks should improve or upgrade their liquidity risk management system in crucial elements of liquidity risk management and they should also diversify their source of fund and actively monitor their intraday liquidity position in order to meet their business objectives. Moreover, NBE should be actively monitoring the existing liquidity risk problems by reviewing the policies and conducting close follow up