Determinants of Banks Liquidity: A Study on Selected Commercial Banks in Ethiopia

Abstract

Liquidity creation is the main concerns of commercial banks since it is crucial for its existence; hence the main objective of this study was to identify the determinants of commercial banks liquidity in Ethiopia. In order to achieve the research objectives, data was collected from a sample of seven commercial banks in Ethiopia over the period from 2001 to 2015. Bank specific and macroeconomic variables were analyzed by using the balanced panel fixed effect regression model. Bank’s liquidity is measured in three ratios: liquid asset to deposit and short term borrowing, liquid asset to total asset and loan to deposit and short term borrowing ratios. Results of panel data regression analysis showed that capital adequacy, nonperforming loan, profitability, interest rate margin and inflation had positive and statistically significant impact on Ethiopian commercial banks liquidity while bank size, loan growth and interest rate on loans had negative and statistically significant impact on Ethiopian commercial banks liquidity. Real GDP growth rate and short term interest rate had statistically insignificant impact on banks liquidity.