Abstract:
Lack of liquidity in banking industry during the recent financial crisis leads banks to face many
negative events. 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 reduce their liquidity problem 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 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 by using their websites. 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 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 level 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
