Key Drivers of Liquidity Risk in The Banking Industry of Ethiopia
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Date
2025-10
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Abstract
This study investigates the key drivers of liquidity risk in the Ethiopian banking industry, using bank-specific and macroeconomic factors. Using panel data from 17 commercial banks over the period 2000–2023, the research employs a fixed effects model to analyze the determinants of liquidity risk, measured by the liquidity ratio (LR). Bank-specific factors such as bank size (BS), capital adequacy ratio (CAR), asset quality (AQ), and loan-to-deposit ratio (LDR) are examined alongside macroeconomic variables, including GDP growth rate (GDPR), inflation rate (INFR), and interest rate spread (INTR). The findings of the study revealed that Lagged LR and capital adequacy have a significant positive impact on liquidity. Conversely, the loan-to-deposit ratio shows a Significance negative relationship with liquidity. Macroeconomic factors such as GDP growth and inflation have negative and insignificance influences on liquidity, while interest rate spreads has positive and significant impact on liquidity. The research concluded that both bank specific and macroeconomic factors have impact on the liquidity of banks. Thus, the researcher recommended that commercial banks and policymakers need to ensure prudent lending practices, regulatory oversight, and macroeconomic stability to mitigate liquidity risks. This study contributes to the existing literature by providing a comprehensive analysis on the determinants of liquidity risk in a developing economy, offering valuable insights for academicians, practitioners, and policymakers.
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Bank Size, Capital Adequacy Ratio, Liquidity Ratio, Loan to Deposit