Determinant Factors Affecting Liquidity of Commercial banks

Abstract

This study aims to investigate the determinants of liquidity of commercial banks of Ethiopia. The study used longitudinal panel survey design. The study was based on secondary data sources. Panel data acquired from financial statements and balance sheet were used as a data source; while the secondary data was collected through published and unpublished documents. Fifteen commercial banks were included and selected for the purpose of this study considering that with a total of 150 observations was used. The study used panel data from 2011-2020 to evaluate determinants of liquidity. In addition to this, OLS was used to identify the determinant factors affecting liquidity of commercial banks. The result of the study found out that statistically significant effect was observed between the determinants and liquidity of commercial bank. Thus the study concludes that the independent variables such as ROA, Capital Adequacy, Deposit Growth, Loan Growth, Reserve Requirement, Treasury Bill purchase, GDP, Inflation rate and Exchange rate together affected 59.45 % of variability in the dependent variable of liquidity of commercial banks. In addition, the study also concluded that performance(ROA), Deposit Growth, loan Growth, GDP and Exchange rate affected liquidity significantly; while capital adequacy, reserve requirement, treasury bill purchase and inflation rate affected liquidity insignificantly. Based on the findings the study concluded that, return on asset has positive and significant effect on the liquidity of commercial banks. The study also concluded that a 100% increase in ROA also increases 97.5% of liquidity. Based on the conclusion the study recommends liquidity of Ethiopian banks so all private commercial banks in Ethiopia cannot ignore the macroeconomic indicators while targeting to improve their liquidity position.