Factors Affecting Banks Liquidity: Emperical Evidence from Selected Ethiopian Private Commercial Banks
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Date
2026-02-02
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A.A.U
Abstract
Liquidity is one of the major concerns for private commercial banks in Ethiopia and holding the optimum level of liquidity is crucial. Since many of the empirical studies carried out on the commercial banking industry of Ethiopia were mainly focused on examinations of factors influencing the profitability of banks, and limited attention was given to consider the bank’s liquidity and its determinants the objective of this study was to identify the determinants of liquidity position of private commercial banks in Ethiopia. Quantitative research approach and explanatory design adopted to show the cause and effect relationship between the dependent and independent variables. Balance panel data was collected from a sample of eight private commercial banks in Ethiopia from 2018 to 2024 by using purposive technique. Both bank specific and macroeconomic variables were analyzed using both inferential (balanced panel pooled effect regression model) and descriptive statistic (both graphical and summary statistics) with the aid of Stata19.5 software. The dependent variable (bank’s liquidity) measured as the ratio of total customers loans and advance to its total deposit. The findings of the study revealed that at 5% significance level among the bank specific factors bank size and non-performing loan have negative and statistically significant impact on liquidity; while, profitability and capital adequacy ratio have positive and statistically significant impact on liquidity of Ethiopian private commercial banks. On other hand, from the macro-economic level factors except the foreign exchange rate all variables (GDP, CPI and IRM) have negative and statistically significant impact on private commercial banks liquidity. However; loan growth, deposit growth and foreign exchange rate have no statistically significant effect on the liquidly of Ethiopian private commercial banks. As the ratio of loans and advances to deposit LR of 0.796, indicated that the sampled banks on average does not offered loans to their clients almost 20.38% (greater than the threshold amount of 15% set by NBE) which implies that as far as considering the quantitative factors considered the sampled commercial banks have moderate liquidity risk. Finally, the study provides useful insights for interested parties on the liquidity levels of Ethiopian commercial banks and their determinants and contributes to the scarce empirical evidence.
Keywords: Determinants of Liquidity, Ethiopian Private Commercial Banks, Liquidity Ratio, balanced panel data regression analysis.