Firm-Specific and Macroeconomic Determinants of Banks Liquidity: Empirical Investigation from Ethiopian Private Commercial Banks

Abstract

This study aimed to examine the firm-specific and macroeconomic variables which can affect the liquidity position of private commercial banks in Ethiopia. For the current study, secondary data were extracted from audited annual financial reports of eight purposefully selected private commercial banks covering the period of 2011-2017. The panel data was analyzed by adopting the balanced panel fixed effect regression model. The study revealed that firm (bank) specific factors namely the size of banks, loan growth and deposit are found to be significant determinants of the banks' liquidity. Moreover, macroeconomic determinants consisting of interest rate margin, national bank bills purchase, GDP and annual inflation have a significant influence on the liquidity of private commercial banks of Ethiopia. This study recommends that private commercial banks in Ethiopia should be more concerned with the macroeconomic environment in addition to the internal environment in formulating strategies to enhance their liquidity position. Despite its limitations, this study contributes to the scarce knowledge of firm-specific and macroeconomic determinants of banks liquidity by giving equal attention to the long aged banks and banks that were emerged on later periods.

Macroeconomic and Bank-Specific Variables and the Liquidity of Jordanian Commercial Banks

“…On the contrary, if the majority of depositors were individuals then forecasting would be easier, which would enable banks to operate at low liquidity rates. The result is in line with (Assfaw, 2019;Al-Homaidi, 2019).…”

Firm-specific and macroeconomic determinants of commercial banks liquidity in Ethiopia: Panel data approach

“…Moreover, the Basel (2008) on banking supervision emphasized that the stability of a commercial bank depends on its liquidity position and effective liquidity risk management. To guarantee investor's certainty, administrative bodies need to settle some base breaking points of liquidity of banks' (Bagh et al, 2017), as liquidity can be taken as a fundamental concern to the financial strength of financial institutions, particularly in the banking industry (Assfaw, 2019).…”

“…Many profitable banks' faced difficulties in managing their funds due to the misunderstanding of liquidity risk (Munteanu, 2012), and some banks' despite having a lot of assets, the sudden withdrawals and the lack of liquid funds lead to a huge loss as a result of taking out emergency loans (Assfaw, 2019). Effective liquidity risk management helps in ensuring a bank's ability to meet its obligations as they become due and reduces the probability of a liquidity crisis, on the fact that a liquidity crisis, in the banking sector can have grave systemic implications in emerging economies, where banks' act as a predominant financial intermediary (Sopan & Dutta, 2018).…”

Analyzing the Factors of Firm Liquidity in Chemical Products and Pharmaceuticals Sector of Pakistan

“…They proved a significant impact of GDP, inflation, real interest rate and financial deficit on liquidity of non-financial firms after controlling for endogeneity issues through dynamic panel model. Assfaw (2019) found that firm size, firm growth, GDP and inflation are significant predictors of firm liquidity. Ha & Phan (2018) studied the size, risk, equity ratio, loan ratio, GDP growth rate has a significant negative impact on liquidity.…”