Determinants of Banks Liquidity: The Case of Private Banks in Ethiopia

Kidist Tibebu

doi:10.7176/rjfa/10-3-05

Abstract

The objective of the study was to examine the impacts of both bank specific and macroeconomic factors on banks liquidity of Ethiopian private commercial banks and examine the trends of private banks liquidity. In order to achieve the objectives the researcher used Quantitative research approach and balanced panel data. Fixed effect regression model was used to examine the impacts of independent variables on dependent variables for selected private banks in Ethiopia from 2009-2016. Data was collected from NBE annual report and MOFED. The collected data was analyzed by using descriptive statistic and inferential analysis. The study used bank size, profitability, capital adequacy; cash reserve ratio, interest rate margin, loan growth rate, nonperforming loan, interest rate on loan, real GDP, inflation rate as independent variables and liquid asset to deposit ratio as a dependent variable. The result of the fixed effect model suggested that cash reserve ratio, profitability, nonperforming loans had positive and significant effect on banks liquidity, while bank size, deposit ratio, loan growth rate and interest rate margin had negative and significant impact on banks liquidity. However, variables like capital adequacy ratio, real GDP and inflation found to be insignificant. The study suggested that, all private commercial banks of Ethiopia should give due attention to bank specific factors by providing effective and well structured policies and procedures. Keywords :Determinants of banks liquidity, Ethiopian Private commercial banks, Fixed Effect Regression model, and Liquid asset total deposit ratio DOI : 10.7176/RJFA/10-3-05

Highlights

Banks to be effectively discharge their responsibilities of availing funds to customers; they must be in a healthy condition
Methods in this study quantitative research approach was used to investigate the causal relationship between the liquidity of private commercial banks and the bank specific and macroeconomic factors affecting banks liquidity in Ethiopia
Bank specific data was collected from audited financial statement of each selected private commercial banks of Ethiopia and macroeconomic factors were collected from National Banks of Ethiopia (NBE) annual reports and Ministry of Finance and Economic Development (MOFED)

Summary

Introduction

Banks to be effectively discharge their responsibilities of availing funds to customers; they must be in a healthy condition. According to Diamond and Dybvig (1983), the reason why banks may not be in healthy condition is their role in transforming maturity. When banks transform short term deposits to long term loans, the banks will be exposed to liquidity risk because of maturity mismatch. Liquidity of banks is a measure of its ability to hold cash it need to meet its obligation. Liquidity came from direct cash holding in currency or on account at the Federal Reserve and Central Bank as well as from holding securities that can be sold with minimum loss. In order to maximize their profit and enable to meet their obligation banks have to provide adequate liquidity (Vodova, 2011)

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