THE EFFECT OF ASSET LIABILITY MANAGEMENT ON THE LIQUIDITY RISK OF SELECTED COMMERCIAL BANKS IN ETHIOPIA

ALM is the ongoing process of formulating, implementing, monitoring, and revising strategies<br> related to assets and liabilities to achieve an organization’s financial objectives, given the<br> organization’s risk tolerances and other constraints. Liquidity risk is the risk that the bank will<br> not be able to meet efficiently both expected and unexpected current and future cash flow and<br> collateral needs without affecting either daily operations or the financial condition of the firm.<br> The objectives of the study were to analyze the impact of asset liability management on the<br> liquidity risk of selected commercial banks in Ethiopia. Seven commercial banks (one<br> governmental and six private commercial banks) for fifteen years from 2004-2018 operating<br> period were used in the study. Secondary quantitative data were used as sources of data from<br> NBE record and report of each selected banks for the stated period. Panel fixed effect regression<br> model of multiple regression model was adopted. The model was estimated by using liquidity risk<br> measured by the ratio of net liquid asset to short term liability as dependent variable and eight<br> asset liability management indicators as independent variables (profitability, capital adequacy,<br> loan to deposit ratio, loan growth, and deposit growth, liquid asset to total asset ratio, income<br> diversification, and bank size). R-squared statistics and the adjusted R-squared statistics of the<br> model was 66% and 61% respectively. The association between liquidity risk and return on<br> equity as measurement of profitability, loan to deposit ratio, loan growth, deposit growth, and<br> ratio of interest income to total income was negative, whereas, the association between liquidity<br> risk and the remaining variables (capital adequacy, ratio of total liquid asset to total asset and<br> bank size) was positive. The significant variables were profitability, capital adequacy, deposit<br> growth, loan growth, and bank size. On the other hand the ratio of total loan to total deposit,<br> ratio of total liquid asset to total asset and income diversification measured by ratio of interest<br> income to total income were not statistically related with the liquidity risk of selected Ethiopian<br> commercial banks during the study period. The banks are advised to review their strategy on<br> each significant variable to keep the desired level of liquidity position and enable to manage<br> their liquidity risk. Specially, there should be tradeoff between the profitability and liquidity.