Determinants Of Banks Liquidity And Their Impact On Profitability Evidenced From Eight Commercial Banks In Ethiopia

Liquidity is increasingly important in the face of high funding costs. The main objective ofrnthis paper was to study and identify the main determinates of Ethiopian commercial banksrnliquidity and its impact on profitability. In order to achieve the objective a secondaryrnsources of data were collected from eight commercial banks in the sample covering thernperiod from 2002/03 to 2013/14 and analyzed themwith panel data regression analysis.rnThe results of regression analysis showed that Bank size and Loan growth had negativernand statistically significant impact on banks liquidity measured by Liquide asset to totalrnAsset. Real growth rate of gross domestic product on the basis price level, Interest rate onrnlending ,Non-performing loans in the total volume of loans, Bank size, Actual reservernration and short term interest rate had positive and statistically. Among the statisticallyrnsignificant factors affecting banks liquidity bank size had positive and statisticallyrnsignificant impact on Profitability whereas, growth rate of gross domestic product on thernbasis price level, Actual reserve rate and Non-performing loans in the total volume ofrnloans had negative impact on profitability. Therefore, the impact of bank liquidity onrncommercial bank profitability was non-linear. Bank size, and Adjusting the liquidityrnposition with better strategy for managing credit risk (NPL) has positive impact onrnprofitability. Also, the study suggest that commercial banks in Ethiopia shouldrnencouraged to conduct research on liquidity issues faced by banks, identify their optimalrnlevel of liquid asset holdings by weighting the marginal costs and marginal benefits ofrnholding. Since, commercial banks do not respond to the dynamics of economic growthrnwhich can be taken as an indication of ineffective competition and efficiency in thernBanking sector, NBE should come out with strict rules and regulations for controlrnmechanism of firm specific and macroeconomic factors.rnKeywords: bank’s liquidity, commercial banks, profitability, fixed effect multiple linearrnregressions,

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