Determinants of Liquidity in Ethiopian Private Commercial Banks

Abstract

This study examines the determinants of liquidity in Ethiopian private commercial banks over the period 2011–2022. Maintaining adequate liquidity is vital for the stability and performance of the banking sector, particularly in developing economies where financial markets are shallow and access to external liquidity is limited. The study aims to identify the key bank-specific and macroeconomic factors that influence the liquidity position of private commercial banks in Ethiopia. Panel data were collected from audited annual financial statements of selected private commercial banks and macroeconomic indicators obtained from the National Bank of Ethiopia and the World Bank. The study employed descriptive statistics, correlation analysis, and panel regression models to analyze the data. After conducting model specification tests, the Random Effects model was selected as the most appropriate estimator. The empirical results revealed that capital adequacy ratio (CAR) and profitability (ROA) have a positive and statistically significant influence on bank liquidity, indicating that well-capitalized and profitable banks are better positioned to maintain adequate liquidity buffers. Conversely, non-performing loans (NPL) and loan growth (LGR) exhibited negative and significant relationships with liquidity, suggesting that poor asset quality and aggressive credit expansion tend to constrain liquidity. Among macroeconomic variables, GDP growth rate positively and significantly affected liquidity, while inflation had a negative though marginally significant impact. Other variables such as bank size and interest rate spread showed weak or insignificant effects. Oveall, the findings imply that internal bank management practices and financial strength play a more decisive role in determining liquidity than external economic conditions. The study concludes that improving capital positions, enhancing profitability, managing credit risk, and maintaining prudent lending policies are critical to sustaining liquidity in Ethiopian private banks. It further recommends that regulators strengthen supervisory frameworks and promote macroeconomic stability to support the soundness and resilience of the banking sector.