Conundrums of the Liquidity Determinants of Commercial Banks in Ethiopia

Abstract

This study examines the nexus between liquidity and its determinants in Ethiopia's private bank commercial banks. The study employed a causational research design by utilizing data from 2011–to 2021. The study unit of analysis is 15 Commercial banks in Ethiopia. It utilized General Methods of Moment (GMM) dynamic panel regression.The finding showed that bank profit, interest rate margin, concentration ratio, and inflation havesignificantly negatively contributed to bank liquidity. However, capital adequacy has no significant effect on the bank's liquidity. Besides, the growth of the Gross domestic product and exchange rate significantly enhance the bank's liquidity. The study urges the bank management and regulatory body to search for the optimum trade-off point between profit and interest rate spread with the required level of liquidity. Besides, policymakers and regulators should take a measure that neutralizes the detrimental effect of the market structure of the banking industry. Since inflation and money supply (M2) negatively affect liquidity, it is vital to transform macroeconomic variables into a robust institutional mechanism to enhance liquidity. Generally, the study recommends continued supervision and support to shield banks from a liquidity crunch.