DETERMINANTS OF COMMERCIAL BANKS’ LIQUIDITY IN ETHIOPIA

Abstract

This study is about determinants of CBs’ liquidity in Ethiopia. Liquidity is a life blood and corner stone for commercial banks existence and prosperity. The foremost objective of this study was to identify and examine determinants of CBs’ liquidity in Ethiopia. The study adopted explanatory research design by applying quantitative research approach via employing secondary panel data of seven commercial banks for the period covering from 2000-2016. The study used purposive sampling method with selection criteria of longest establishment years, panel financial data availability, strong capital and assets share and ample operational experience for selection of seven from total of seventeen CBs. Bank specific, industry specific and macroeconomic factors determine liquidity are analyzed by descriptive statistics, correlation and regression analysis techniques by balanced panel fixed effect multiple regression analysis model. The results revealed that capital adequacy, non-performing loans and advances, interest rate on loans and advances, national bank bill purchase policy and general inflation rate have positive and statistically significant whereas bank size, profitability, interest rate margin and money market interest rate have negative and statistically significant influence on CBs’ liquidity in Ethiopia. But real GDP growth rate and unemployment have statistically insignificant influence on CBs’ liquidity in Ethiopia. The study advices CBs manage assets and liability by drawing orthodox liquidity management strategy, policy and procedure/guideline that enable them to alleviate significant influential factors and maintain reputation, remain competitive and profitable in banking industry. NBE shall establish secondary money market for easy liquidity access, draw equally applicable directive for public and private CBs regarding liquidity creation, distribution and holding and build public confidence by stabilize banking system efficiency. MoFEC and PFEA shall establish strategic policy that facilitate CBs’ liquidity position by minimizing failure risks and create sustainable economic development and growth that can alleviate inflation and unemployment rate in order to increase financial soundness, strength, competiveness, development and growth of banking industry.