Effect of Liquidity Risk on the Performance of Banks in Ethiopia: The Case of Selected Private Commercial Banks.
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Date
2021-02
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A.A.U
Abstract
The main role of banks in any economy is maturity transformation from short term deposit in to long term loan. This function makes banks inherently exposed to liquidity risk both of an internal and external factor. The purpose of this study was to observe effect of liquidity risk on financial performance of Ethiopian private commercial banks. To achieve the research objectives, descriptive research design and quantitative research approach was used and data was collected from a sample of nine Ethiopian private commercial banks for the period covered from 2011 to 2019 years. To indicate the effect of liquidity risk on the performance of banks, financing gap ratio, liquid asset to total asset ratio, total loan to total asset ratio cash reserve ratio and bank size and GDP growth rate were used in this study while the financial performance of commercial banks was measured by the return on asset. by applying panel data method, using secondary data source, Radom Effect Model and descriptive statistics, correlation and multiple regression analysis, the selected six variables were analyzed. The effect of analysis indicates that the ratio of financing gap, liquid asset over total asset and Cash reserve and bank size had statistically significant impact on Ethiopian commercial banks performance and except bank size all had positive relationship with dependent variable. Whereas, the ratio of total loan over total asset and GDP growth rate had positive relationship but had no significant impact on performance of Ethiopian commercial banks. Therefore, liquidity risk was positively affecting the financial performance of Ethiopian commercial banks. The study suggests that commercial banks should maintain enough liquidity fund to overcome the uncertain situation of liquidity shortage and carefully monitoring the quality of the asset, bank should identify their optimal level of liquid asset holdings by weighting the marginal costs and marginal benefits of holding and the bank management should trade off conserving money and investing it depending on its funding needs.
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Liquidity risk, Financing gap, Commercial Bank, Panel data