DETERMINANTS OF LIQUIDITY RISK IN SELECTED PRIVATE BANKS OF ETHIOPIA

Abstract

The main trigger of all the negative events during the recent financial crisis is a result of lack of liquidity in the banking industry. Thus, in Ethiopia as Banks dominate the financial sector of the country, each Ethiopian private bank should require having their own liquidity policy to keep the optimal liquidity position and to meet the demand of their present and potential customers. The main objective of this study is to examine the determinants of liquidity risk in selected private commercial banks of Ethiopia. In order to achieve the stated objective, the study used both descriptive and explanatory type of research design and adopts a quantitative research approach with secondary data sources that are collected from annual report of each selected private banks and NBE. The study identifies some of bank specific, industry specific and macroeconomic determinants that affect liquidity risk of Ethiopian private commercial banks based on empirical literatures. The study used a balanced panel data of fourteen private commercial banks with audited financial statements that covered the period from 2012 to 2020 and used liquid asset to total asset ratio as a proxy for liquidity risk. The study also applied a random effect regression model and correlation analysis with a descriptive statistics to analyze the data using the econometric package STATA version 13 software. The random effect regression revealed that from bank specific explanatory variables; bank size, profitability ( ROA), quality of asset, lending interest rate, money supply growth and GDP growth rate have a significant effect on liquidity risk of private commercial banks. Among these statistically significant variables, bank size, quality of assets, lending interest rate and GDP growth rate have negative effect whereas profitability (ROA) and money supply have statistically positive effect on liquidity risk of Ethiopian private commercial banks. Other variables such as rate of deposit and cost of fund have insignificant effect on liquidity risk of private commercial banks in Ethiopia. Finally based on the finding of the study it has been suggested that the Ethiopian private commercial banks needs to give an emphasis on liquidity management policy to ensure the ability of meeting the financial demands of their customers by maintaining optimum level of liquidity.