Factors Affecting Liquidity of Commercial Banks in Ethiopia
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Date
2017-01
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Addis Ababa University
Abstract
Banks are both the center for liquidity creation and financial crisis due to its role in the
‘maturity transformation’ of short term deposits into long term loans make banks inherently
vulnerable to liquidity risk, both of an institution specific nature and that which affects markets
as a whole. The study had assessed the factors affecting liquidity of commercial banks in
Ethiopia by using the data over the period of 2011 to 2015 on sample size of twelve commercial
banks in Ethiopia out of 17 in total with the aim of investigating macroeconomic as well as
government policy and bank specific variables which affecting the liquidity of commercial banks
in Ethiopia. The study employed sequential mixed research method approach by combining
secondary data through balanced random effect regression model and interviews. The results of
the study revealed that all macroeconomic and government policy variables were statistically
significant in determining the liquidity of commercial banks in Ethiopia. Among those variables
foreign direct investment and NBE-bill purchase had negative effect whereas unemployment rate
and real GDP growth rate had positive relationship with banks’ liquidity. On the other hand,
among the bank-specific factors funding cost was statistically insignificant variable in affecting
commercial banking liquidity in Ethiopia whereas level of deposit and bank size had statistically
significant and negative relationship with banks’ liquidity. Thus, the study suggests that
macroeconomic factors are more important than firm-specific in determining the Ethiopian
commercial banking liquidity. Therefore, banks shall be more concerned about macroeconomic
environment in addition to internal environment as a cornerstone while reviewing
its policy and developing strategies to enhance their liquidity position.
Key words: Ethiopian commercial banks, liquidity ratio, liquid assets, NBE –bills, deposit
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Keywords
Ethiopian commercial banks, Liquidity ratio, Liquid assets, NBE –bills, Deposit