Determinants of Liquidity in Banking Business: The Case of Selected Private Commercial Banks

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Liquidity is one of the major concerns for banks and thus achieving the optimum level of liquidity is crucial. The main objective of this study was to identify the determinants of liquidity of private commercial banks in Ethiopia. In order to achieve the research objectives, data was collected from a sample of seven private commercial banks in Ethiopia over the period from 2008to 2018. Bank specific and macroeconomic variables were analyzed by using the balanced panel fixed effect regression model. The findings of the study confirmed the lower capacity of private commercial banks to absorb liquidity shocks. The study also revealed that, Loan loss provision and Unemployment rate have positive and significant impact on liquidity and Bank size has negative and significant impact on liquidity; however, capital adequacy, Loan growth, Non-performing loan and real GDP growth rate have no statistically significant effect on the liquidity of Ethiopian private commercial banks. Thus, the study suggests that banks should ensure that they have sufficient capacity to absorb liquidity shocks by increasing their deposit through expanding their customer base andmaking the product accessible to customers. Andalso should purse a balanced approach of their credit and liquidity management, which helps to manage their liquidity position.


A thesis submitted in Partial Fulfillment of the Requirements for the Degree of Masters of Business administration in finance


Determinants of Liquidity, Ethiopian Private Commercial Banks Balanced Panel Fixed Effect Regression Model