Determinants of Banks Liquidity and their Impact on Financial Performance: Empirical Study on Commercial Banks in Ethiopia

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Addis Ababa University


Liquidity can be defined as the ability of a financial institution to meet all legitimate demands for funds (Yeager and Seitz 1989). The aim of this paper is therefore on twofold: firstly to identify determinants of commercial banks liquidity in Ethiopia and then to see the impact of banks liquidity up on financial performance through the significant variables explaining liquidity. Balanced fixed effect panel regression was used for the data of eight commercial banks in the sample covered the period from 2000 to 2011. Eight factors affecting banks liquidity were selected and analyzed. The results of panel data regression analysis showed that capital adequacy, bank size, share of non-performing loans in the total volume of loans, interest rate margin, inflation rate and short term interest rate had positive and statistically significant impact on banks liquidity. Real GDP growth rate and loan growth had statistically insignificant impact on banks liquidity. Among the statistically significant factors affecting banks liquidity capital adequacy and bank size had positive impact on financial performance whereas, non-performing loans and short term interest rate had negative impact on financial performance. Interest rate margin and inflation had negative but statistically insignificant impact on financial performance. Therefore, the impact of bank liquidity on financial performance was non-linear/positive and negative.



Determinants of Banks Liquidity