DETERMINANTS OF LIQUIDITY AND THEIR IMPACT ON PROFITABILITY OF DEVELOPMENT BANK OF ETHIOPIA

Abstract

(Erik Banks2005, pp3), described the term liquidity as ‘‘the availability of cash or equivalent resources and is the lifeblood of every commercial and sovereign entity’’. This paper has two purposes: firstly to identify determinants of Development Bank of Ethiopia’s liquidity and then see the impact of bank’s liquidity on financial profitability through the significant variables explaining liquidity. Ordinary list squire regression model was used to analyze the data covering twenty four years (1990 – 2013). Six factors affecting bank’s liquidity were selected and analyzed. The results of regression analysis showed that short term interest rate and inflation had positive and insignificant impact on DBE’s liquidity. While, NPL ratio impact on liquidity was statistically significant and has positive impact. Loan growth rate and real GDP growth rate had statistically significant effect on the liquidity of DBE and has a negative impact. Among the statistically significant factors affecting bank’s liquidity like real GDP growth rate and loan growth rate had positive impact on financial performance whereas, inflation had positive but statistically insignificant impact on financial performance. Therefore, the impact of bank liquidity on financial performance was non-linear/positive and negative.