Determinants of Banks Liquidity and their Impact on Profitability: Evidenced from Eight Commercial Banks in Ethiopia
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Date
2015-06
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Addis Ababa University
Abstract
Liquidity is increasingly important in the face of high funding costs. The main objective of
this paper was to study and identify the main determinates of Ethiopian commercial banks
liquidity and its impact on profitability. In order to achieve the objective a secondary
sources of data were collected from eight commercial banks in the sample covering the
period from 2002/03 to 2013/14 and analyzed themwith panel data regression analysis.
The results of regression analysis showed that Bank size and Loan growth had negative
and statistically significant impact on banks liquidity measured by Liquide asset to total
Asset. Real growth rate of gross domestic product on the basis price level, Interest rate on
lending ,Non-performing loans in the total volume of loans, Bank size, Actual reserve
ration and short term interest rate had positive and statistically. Among the statistically
significant factors affecting banks liquidity bank size had positive and statistically
significant impact on Profitability whereas, growth rate of gross domestic product on the
basis price level, Actual reserve rate and Non-performing loans in the total volume of
loans had negative impact on profitability. Therefore, the impact of bank liquidity on
commercial bank profitability was non-linear. Bank size, and Adjusting the liquidity
position with better strategy for managing credit risk (NPL) has positive impact on
profitability. Also, the study suggest that commercial banks in Ethiopia should
encouraged to conduct research on liquidity issues faced by banks, identify their optimal
level of liquid asset holdings by weighting the marginal costs and marginal benefits of
holding. Since, commercial banks do not respond to the dynamics of economic growth
which can be taken as an indication of ineffective competition and efficiency in the
Banking sector, NBE should come out with strict rules and regulations for control
mechanism of firm specific and macroeconomic factors.
Keywords: bank’s liquidity, commercial banks, profitability, fixed effect multiple linear
regressions,
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Keywords
Bank’s liquidity; commercial banks; profitability; fixed effect multiple linear regressions,