DETERMINANTS OF LIQUIDITY OF COMMERCIAL BANKS’ IN ETHIOPIA

Abstract

The purpose of this research is to identify the factors significant to explain Ethiopian commercial banks liquidity. The study has categorized the independent factors into bank specific factors and macroeconomic factors. The bank specific factors include capital adequacy, bank size, profitability, non-performing loans and leverage and while the macroeconomic factors include gross domestic product, general inflation, national bank bill, interest rate on loans and advances , interest rate margin, money market interest rate and unemployment rate. The panel data was used for the sample of seven commercial banks in Ethiopia from 2000 to 2017 year and estimated using fixed effect model (FEM), data was present by using descriptive statistics and the balanced correlation and regression analysis for liquidity ratios was conducted. This study obtained secondary data from seven Ethiopian commercial banks from the year 2000 to 2017.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 eighteen CBs. Bank 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 study revealed that non-performing loans and advances, interest rate on loans and advances and general inflation rate have positive and statistically significant whereas bank size, national bank bill purchase policy and interest rate margin have negative and statistically significant influence on CBs‟ liquidity in Ethiopia. But capital adequacy, profitability, leverage, real GDP growth rate, money market interest rate and unemployment rate have statistically insignificant influence on CBs‟ liquidity in Ethiopia. The study suggests that focusing and reengineering the banks alongside the key internal drivers could enhance the liquidity position of the commercial banks in Ethiopia. The study also suggests that banks in Ethiopia should not only be concerned about internal structures and policies, but they must consider both the internal environment and the macroeconomic environment together in developing strategies to improve the liquidity position of the banks and to increase financial soundness, strength, competiveness, development and growth of banking industry.