Determinants of Bank Liquidity and Its Impact on Bank Profitability in Ethiopia

Abstract

The objective of the study is to explore determinants of bank liquidity and its impact on bank profitability in Ethiopia by using two-stage least square (2SLS) balanced panel estimation method from 2014-2019. The two dependent variables to be considered under 2SLS balanced panel estimation methods were liquidity risk and bank profitability. The first equation i.e. liquidity risk specified as a function of major explanatory variable i.e. bank profitability, real GDP growth, net loan growth, and foreign exchange availability. Whereas, the second equation i.e. bank profitability specified as a function of bank liquidity, non-interest income, non-interest expense and expectation. The empirical result of the first equation of the study reveals that bank profitability, foreign exchange availability, and real GDP growth have positive significant impact on bank liquidity while net loan and advance has a negative significant impact on bank liquidity. The empirical result of the second equation depicts that bank liquidity has positive effect on bank profitability even if it is insignificant but total non-interest income and expectation have a positive significant effect on bank profitability. Since the paper has also tested some diagnostic check, the result shows that the model has passed the diagnostic test.