Liquidity Risk and Its Effects on financial performance: A case study of selected Ethiopian private commercial banks
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Date
2025-09
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Addis Ababa University
Abstract
This study investigated the impact of liquidity risk on the profitability of Ethiopian private commercial banks. The financial system in Ethiopia heavily relies on banks, which face significant liquidity challenges due to limited external investment options, regulatory constraints, and broader macroeconomic conditions. Unexpected and volatile withdrawals, high concentration of deposits, and non-performing loans exacerbate this risk, potentially destabilizing the banking sector and undermining economic development. An explanatory research design and a quantitative research approach were employed to understand the relationships between independent variables and the dependent variable (profitability). Secondary data, specifically panel data from audited financial statements of ten private commercial banks spanning 2015 to 2024, were collected from the National Bank of Ethiopia (NBE). Macroeconomic indicators like GDP growth and inflation rates were also sourced from the NBE. Descriptive analyses, correlation, and regression analysis using a panel data model were used, with a Hausman test guiding the choice between fixed-effects and random effects models. The study found that capital adequacy, GDP growth rate, loan growth, and bank size had a positive and statistically significant impact on bank profitability. Conversely, non-performing loans and net interest margin had a statistically insignificant and significant negative impact on profitability respectively. Inflation, however, was not found to explain the profitability of Ethiopian private commercial banks. The study recommended that key factors company size, loan growth ratio, GDP growth rate, capital adequacy, and net interest margin influencing profitability require full attention from bank owners and management. Ethiopian private commercial banks should also adjust their strategies to consider internal and external environments and liquidity concerns from economic dynamics to improve management efficiency. Strengthening capital adequacy and mitigating the impact of non-performing loans are crucial for sustained profitability.
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capital adequacy, Bank size, Net interest margin, Loan growth ratio, and profitability