Determinants of Banks Liquidity and Its Impact on Profitability on Selected Banks in Ethiopia
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Date
2025-02-06
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AAU
Abstract
The "Determinants of Banks Liquidity and Its Impact on Profitability in Selected Banks in Ethiopia"
are reviewed in this paper, which covers the period from 2002 to 2022. The study uses both fixed
effect and random effect panel data regression models to assess the factors influencing key financial
ratios, such as the Loan to Deposit Ratio (LDR) and Liquid Asset to Total Asset Ratio (LATA),
using a comprehensive dataset obtained from audited financial statements of sampled banks.
Descriptive statistics indicate conservative lending practices and strong liquidity management among
these banks, with notable variability observed across different financial metrics. The correlation
analysis reveals there is moderately positive association between liquidity (measured by LATA) and
profitability (measured by Return on Assets, ROA), suggesting that higher liquidity corresponds with
increased profitability. Conversely, there is a significant positive correlation between LDR and Net
Interest Margin (NIM), suggesting that effective asset-liability management enhances profitability.
Panel unit root tests ensure the variables' stationarity post-differencing, thereby guaranteeing reliable
regression outcomes. Model diagnostics, including tests for multicollinearity, normality,
heteroscedasticity, and autocorrelation, validate the robustness of the regression models. The results
underscore the importance of capital adequacy and effective asset-liability management in enhancing
bank performance. This research contributes to the existing studies by providing nuanced insights
into the financial trends with in the Ethiopian banking industry and offers practical implications for
policymakers and banking professionals.