The Effect of Liquidity Management on the Performance of Commercial Banks in Ethiopia: In the Case of Selected Commercial Banks in Ethiopia
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Date
2021-04
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Abstract
The aim of the study to examine the effect of liquidity management on the performance of selected
commercial banks of Ethiopia. In order to achieve the stated objectives a quantitative approach was
used. To this end, the researcher took nine explanatory variables of liquidity management variables;
those are bank specific (Capital adequacy(CAP),current assets to total asset ratio(CATAR),loan to
deposit ratio(LDR),liquid assets to net current liability ratio(LACLR),liquid asset to total asset
ratio(LATAR),liquid assets to deposit ratio(LATDR),non-interest expense to total income
ratio(ME)and macro-economic variables(GDP and inflation rate(INF)).Balanced fixed effect panel
regression was used for the data of seven commercial banks(namely Awash bank(AIB), Bank of
Abyssinia(BOA),Commercial bank of Ethiopia(CBE),Dashen bank(DB), Nib international
bank(NIB),Hibret bank(HB) and Wegagen bank(WB) in the sample covered the period from 2000 to
2018 G.C. The study used return of asset (ROA) used as dependent variable for measuring the
profitability of the selected commercial banks the above liquidity variables used as explanatory
variables. The study based on a balanced panel constructed ordinary least square (OLS) and fixed
effect model. The regression result showed that capital adequacy (CAP), GDP and inflation rate had a
positive and significant effect and non-interest expense to total revenue ratio had negative and
significant effect. On the other hand current asset to total asset ratio (CATAR), loan to deposit ratio
(LDR) had positive but insignificant effect and liquid asset ratio (LATAR), Liquid assets to net current
liabilities ratio (Quick ratio) and liquid asset to deposit ratio (LATDR) had inverse relationship and
insignificant effect on the ROA of the selected commercial banks within the study time frame.
Therefore, liquidity management had non-linear effect on the performance of the banks.
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Keywords
liquidity, management, profitability, commercial banks