Determinants of Liquidity risk of Private Commercial Banks in Ethiopia

This study was conducted on determinants of liquidity risk of all private commercial banks in Ethiopia. Since the census study (all private commercial banks in Ethiopia were observed) it was different from other studies on liquidity risk and other related studies of private commercial banks in Ethiopia. The major objective of the study was to investigate the firm specific (microeconomic) and macroeconomic variables which can affect the liquidity position of private commercial banks in Ethiopia. Secondary data had been collected from banks under this study and from National bank of Ethiopia for the period of 2014-2019. The balanced panel data was analyzed by adopting the balanced panel random effect models and descriptive data analysis. The result of descriptive data analysis showed that mean value of LDR was 0.640 that indicated all private commercial banks in Ethiopia had liquidity risk because of the greater proportion of deposit mobilization concentrated on loan and advances of Private Commercial Banks in Ethiopia. The random effect panel data model revealed that bank size and loan growth had positive correlation and significant effect on LDR of private commercial banks in Ethiopia. The macroeconomic variables consists inflation, GDP and deposit interest rate had negative correlation and significant effect on LDR of private commercial banks in Ethiopia. Whereas microeconomic variables of capital adequacy, deposit liability, profitability and non-performing loan had insignificant effect on LDR of private commercial banks in Ethiopia and all except deposit liability had positive correlation to liquidity risk of private commercial banks in Ethiopia. The study recommends that since all external variables had significant effect on liquidity risk of private commercial banks in Ethiopia and only two from six microeconomic variables had significant effect on it, the private commercial banks in Ethiopia should be more concerned with the macroeconomic environment in addition to the internal environment as a cornerstone of their policy and in formulating strategies to enhance their liquidity position.