THE EFFECT OF LIQUIDITY MANAGEMENT ON PROFITABLITY: IN THE CASE OF COMMERCIAL BANKS’ IN ETHIOPIA

Abstract

The purpose of this study is to investigate the effect of liquidity management on profitability of commercial banks in Ethiopia by using panel data of 15 commercial banks from year 2011 to 2015. The study used quantitative research approach and secondary financial data are analysed by using multiple linear regression models to measure the effect of liquidity management on profitability (ROA). The random effect regression model was applied to investigate the impact of liquidity measures; loan to deposit ratio (LDR),capital and reserve to asset ratio(CPAR), cash and cash equivalent to liability ratio(CAR) and deposit to asset ratio (DAR) on major bank performance measure on return on asset(ROA). The study used correlation and regression analysis for each of the variables in the study to observe the association between variables on profitability throughout the observation period. The empirical results shows that the bank specific factor; loan and advance, capital adequacy, deposit ratio ,and cash and cash equivalent ratio have weak influence on the profitability of commercial banks in Ethiopia. The impact of liquidity on profitability of commercial banks in Ethiopia is both positively & negatively related and the significant relationship varies from measure to measure. Finally, there has to be further research apart from bank specific measures considered in this study on the relationship between liquidity and performance of commercial banks in Ethiopia by incorporating regulatory factors and other bank specific and macroeconomic factors. Further research is recommended on how to achieve the optimal liquidity level in commercial banks.