Determinants of Liquidity In Case of Ethiopian Commercial Banks

Abstract

Liquidity reflects the capability of commercial banks to fund asset growth and meet obligations as they mature without incurring losses. Accordingly, the main aim of this study is to examine the determinants of liquidity within the context of Ethiopian commercial banks. To achieve this objective, the researcher employed a purposive sampling technique to select eleven commercial banks in Ethiopia, analyzing audited annual reports and data from the National Bank of Ethiopia covering the period from 2013/14 to 2022/23. Grounded in a positivism knowledge claim, a quantitative approach was applied to the continuous data. Furthermore, because individual banks may differ in organizational culture or management quality, a random effects (RE) regression technique was utilized for the empirical analysis. The findings reveal that capital adequacy, loan growth, deposit mobilization, money supply, and GDP growth have statistically significant effects on bank liquidity. Specifically, capital adequacy and deposit mobilization exert a positive impact. These variables carry important practical implications for bank management. Based on these insights, it is suggested that Ethiopian commercial banks optimize their liquidity by maintaining adequate capital, launching aggressive deposit mobilization campaigns, and aligning with contractionary monetary policy. Ultimately, this study contributes unique value to the existing literature by expanding both the sample size to eleven commercial banks and the number of observations, while introducing money supply (M2) as a fresh explanatory variable.

Keywords: Liquidity, commercial banks, capital adequacy, deposit mobilization