Determining Factors of Liquidity of Private Commercial Banks in Ethiopia

Abstract

This study intended to examine the determinants of Liquidity in Private Commercial Banks in Ethiopia. In view of that, this study determined the bank specific and macro-economic factors affecting bank liquidity for Six Private commercial banks in Ethiopia, covering the period of 2000-2017 by using balanced fixed effect panel regression. The findings of the study showed that capital adequacy, and inflation had statistically significant and positive relationship with banks’ liquidity. Bank size had a negative and statistically significant impact on Private Commercial banks .Loan growth had positive and statistically insignificant impact on Private Commercial banks. GDP growth rate has statistically insignificant and positive influence on the liquidity of private commercial Banks. Inflation had positive and significant impact on banks liquidity. On the other hand, the results of the study profitability were quite surprising. The result is conflicting with researcher’s expectations and also a finance theory which emphasizes the negative correlation of liquidity and profitability. Moreover, the coefficient of profitability was not statistically significant, implying that its Influence is insignificant. This positive relation shows that, higher profitability leads to increase banks liquidity. Conclusion about the impact of Ethiopian bank’s profitability on liquidity remains ambiguous and additional investigation is required. The researcher recommended that to maintain adequate system for managing liquidity of private commercial banks in Ethiopia.