The Impact of Liquidity Risk on Financial Performance of Commercial Banks in Ethiopia
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Date
2019-02
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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