The impact of Liquidity on performance: Empirical Study on Ethiopian Private commercial Banks
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Date
2015-06
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Addis Ababa University
Abstract
Recent financial shocks have generated a lot of debates over the issue of liquidity risk
and strategies to mitigate its effects on financial institutions, particularly banks as
majors’ players in the funding liquidity markets. The purpose of this study is to
investigate the impact of liquidity on performance of banks in Ethiopia by using data of
eight private commercial banks from year 2009/10 to 2013/14. The study used
quantitative research approach and secondary financial data which is analyzed by using
multilevel linear regressions models for the three bank performance measures; Return
on Asset (ROA), Return on Equity (ROE), and Net Interest Margin (NIM). The random
effect multilevel regression model was applied to investigate the impact of liquidity
measures; loan to deposit ratio (LDR), loan to asset ratio(LAR), and liquid asset to deposit
ratio(LADR) on major bank performance measures i.e., (ROA), (ROE), and (NIM)
separately. Eight private banks are randomly selected and considered in the sample out of
sixteen private banks representing 50% in number. The study used trend analysis using
graphs for each of the variables in the study to observe the trend on them throughout the
observation period. The empirical results show that the performance (profitability)
measure, NIM, has significant relationship with liquidity measures of LDR, LAR and
LADR. The other performance measure, ROE has positive and significant relationship
with LADR; but ROA has positive and significant relationship with LADR. Hence, the
impact of liquidity on financial performance of private commercial banks in Ethiopia is
both positively & negatively related and the significant relationship varies from measure
to measure. Finally, there has to be further research apart from bank specific measures
considered in this study on the relationship between liquidity and performance of private
commercial banks in Ethiopia by incorporating regulatory factors and other bank specific
and macroeconomic factors. Further research is recommended on how to achieve the
optimal liquidity level in commercial banks.
Key words: Liquidity, Liquidity Risk, Performance, Private Banks
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Keywords
Liquidity, Liquidity Risk, Performance, Private Banks