Conundrums of the Liquidity Determinants of Commercial Banks in Ethiopia

2024 · doi:10.32388/dzu5z7.2
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Abstract

This study examines the conundrums of the liquidity determinants of commercial banks in Ethiopia. The study employed a causal research design by utilizing data from 2011 to 2021. The unit of analysis is 15 commercial banks in Ethiopia. It utilized the General Methods of Moments (GMM) dynamic panel regression. The findings showed that bank profit, interest rate margin, concentration ratio, and inflation have significantly adverse effects on bank liquidity. However, capital adequacy has no significant effect on the bank's liquidity. Besides, the growth of the gross domestic product and exchange rate significantly enhance the bank's liquidity. The study urges bank management and regulatory bodies to search for the optimum trade-off point between profit and interest rate spread at the required level of liquidity. Besides, policymakers and regulators should take measures that neutralize the detrimental effect of the market structure of the banking industry. Since inflation and money supply (M2) negatively affect liquidity, it is vital to transform macroeconomic variables into a robust institutional mechanism to enhance liquidity. Generally, the study recommends continued supervision and support to shield banks from a liquidity crunch.
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License: CC-BY-4.0