Determinants of Banks Liquidity and their Impact on Financial Performance: Empirical Study on Commercial Banks in Ethiopia
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Date
2011-06
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A.A.U
Abstract
Liquidity can be defined as the ability of a financial institution to meet all legitimate
demands for funds (Yeager and Seitz 1989). The aim of this paper is thereof re on twofold:
firstly to identify determinants of commercial banks liquidity in Ethiopia and then to see
the impact of banks liquidity up on financial performance through the significant
variables explaining liquidity. Balanced fixed effect panel regression was used for the
data of eight commercial banks in the sample covered the period from 2000 to 2011.
Eight factors affecting banks liquidity were selected and analyzed. The results of panel
data regression analysis showed that capital adequacy, bank size, share of nonperforming
loans in the total volume of loans, interest rate margin, inflation rate and
short term interest rate had positive and statistically significant impact on banks
liquidity. Real GDP growth rate and loan growth had statistically insignificant impact on
banks liquidity. Among the statistically significant factors affecting banks liquidity
capital adequacy and bank size had positive impact on financial performance whereas,
non-performing loans and short term interest rate had negative impact on financial
performance. Interest rate margin and inflation had negative but statistically
insignificant impact on financial performance. Therefore, the impact of bank liquidity on
financial performance was non-linear/positive and negative.
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Keywords
Banks Liquidity, Commercial Banks