Determinants Of Banks Liquidity And Their Impact On Financial Performance Empirical Study On Commercial Banks In Ethiopia

Liquidity can be defined as the ability of a financial institution to meet all legitimaterndemands for funds (Yeager and Seitz 1989). The aim of this paper is thereof re on twofold:rnfirstly to identify determinants of commercial banks liquidity in Ethiopia and then to seernthe impact of banks liquidity up on financial performance through the significantrnvariables explaining liquidity. Balanced fixed effect panel regression was used for therndata of eight commercial banks in the sample covered the period from 2000 to 2011.rnEight factors affecting banks liquidity were selected and analyzed. The results of panelrndata regression analysis showed that capital adequacy, bank size, share of nonperformingrnloans in the total volume of loans, interest rate margin, inflation rate andrnshort term interest rate had positive and statistically significant impact on banksrnliquidity. Real GDP growth rate and loan growth had statistically insignificant impact onrnbanks liquidity. Among the statistically significant factors affecting banks liquidityrncapital adequacy and bank size had positive impact on financial performance whereas,rnnon-performing loans and short term interest rate had negative impact on financialrnperformance. Interest rate margin and inflation had negative but statisticallyrninsignificant impact on financial performance. Therefore, the impact of bank liquidity onrnfinancial performance was non-linear/positive and negative.

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