The Effect of Loan Portfolio Management on Bank Liquidity: Empirical Evidence from Selected Commercial Banks in Ethiopia
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Date
2025-08
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Addis Ababa University
Abstract
This research investigates the effect of loan portfolio management on the liquidity of selected commercial banks in Ethiopia. Effective loan portfolio management plays a crucial role in
maintaining a bank’s liquidity, ensuring financial stability, and mitigating risks. The study employs an Estimated Generalized least squares econometric regression model using data from
nine commercial banks over a period of eight years (2017–2024) the model was used to correct for heterosdastcity. Liquidity is measured as the ratio of liquid assets to total assets and ratio of
liquid assets to customer deposits, while loan portfolio management is assessed through diversification indices, the Herfindahl-Hirschman Index (HHI) for sectorial and loan-type
diversification. The study also incorporates control variables such as bank size, capital adequacy, profitability, deposit-to-asset ratio, GDP growth, and inflation. The findings reveal
that loan portfolio diversification, sectorial diversification and loan type divarication have a significant effect on bank liquidity. The study concludes that improved diversification strategies
can enhance bank liquidity and financial resilience. It recommends that commercial banks adopt a balanced loan diversification strategy to mitigate liquidity risks while ensuring optimal
financial performance
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Keywords
Loan Portfolio Management, Bank Liquidity, Estimated Generalized Leaset Square, Sectorial Diversification, Commercial Banks, Ethiopia