Abstract:
The main trigger of all the negative events during the recent financial crisis is a result of lack of
liquidity in the banking industry. Thus, in Ethiopia as Banks dominate the financial sector of the
country, each Ethiopian private bank should require having their own liquidity policy to keep the
optimal liquidity position and to meet the demand of their present and potential customers. The
main objective of this study is to examine the determinants of liquidity risk in selected private
commercial banks of Ethiopia. In order to achieve the stated objective, the study used both
descriptive and explanatory type of research design and adopts a quantitative research approach
with secondary data sources that are collected from annual report of each selected private banks
and NBE. The study identifies some of bank specific, industry specific and macroeconomic
determinants that affect liquidity risk of Ethiopian private commercial banks based on empirical
literatures. The study used a balanced panel data of fourteen private commercial banks with
audited financial statements that covered the period from 2012 to 2020 and used liquid asset to
total asset ratio as a proxy for liquidity risk. The study also applied a random effect regression
model and correlation analysis with a descriptive statistics to analyze the data using the
econometric package STATA version 13 software. The random effect regression revealed that
from bank specific explanatory variables; bank size, profitability ( ROA), quality of asset,
lending interest rate, money supply growth and GDP growth rate have a significant effect on
liquidity risk of private commercial banks. Among these statistically significant variables, bank
size, quality of assets, lending interest rate and GDP growth rate have negative effect whereas
profitability (ROA) and money supply have statistically positive effect on liquidity risk of
Ethiopian private commercial banks. Other variables such as rate of deposit and cost of fund
have insignificant effect on liquidity risk of private commercial banks in Ethiopia. Finally based
on the finding of the study it has been suggested that the Ethiopian private commercial banks
needs to give an emphasis on liquidity management policy to ensure the ability of meeting the
financial demands of their customers by maintaining optimum level of liquidity.
