The Impact of Liquidity Risk on Financial Performance of Commercial Banks in Ethiopia

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Date

2019-02

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Journal ISSN

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Publisher

Addis Ababa University

Abstract

The basic function of banks in any economy is maturity transformation from short term deposit in to long term loan. This role makes banks inherently vulnerable to liquidity risk both of an institution-specific nature and markets as a whole. The aim of this study was to examine the effect of liquidity risk on financial performance of Ethiopian commercial banks. Balanced Fixed effect panel regression was used for the data of nine commercial banks for the sampled covered period from 2007 to 2016 and secondary data were used. Eight factors affecting financial performance of Ethiopian commercial banks were selected and analyzed. The result of panel data regression analysis showed that liquidity coverage ratio, net stable funding ratio, loan to deposit ratio and liquidity ratio had negative and statistically significant impact on Ethiopian commercial banks financial performance. Cash reserve ratio, portion of nonperforming loan from the total bank loan, CPI and GDP growth rate had negative but statistically insignificant/ has no any impact on financial performance of Ethiopian commercial banks for the tested period. Therefore, liquidity risk was negatively affecting the financial performance of Ethiopian commercial banks. Finally, the study recommend that a bank’s management invest the commercial banks tied up deposit/money on the market either in the form of loan or other investment and develops different new credit products like personnel loan, vehicles loan, mortgage loan, consumer loan to generate high amount of profit.

Description

A Thesis Submitted to the School of Graduate studies of Addis Ababa University in Partial Fulfillment of the Requirements for the Degree of Master of Science in Accounting and Finance.

Keywords

Financial performance, Liquidity risk

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