Determinants of Liquidity Risk

Banks play a crucial role in the overall development of a given country. Though liquidity risk is one of the main risk of commercial banks and affects the development of the financial system as a whole, there is almost no or little attempt was done to examine its determinants in Ethiopian commercial banks. Thus, this study attempted to find out determinants of liquidity risk in Ethiopian commercial banks covering a six years period (2007-2012) on ten sample commercial banks using secondary data. Both bank specific and macroeconomic liquidity risk determinants were investigated employing the fixed effect panel data regression model. The study revealed that bank size, capital adequacy, dependency on external fund and liquidity of assets have a negative statistically significant relationship with liquidity risk. However, according to the fixed effect panel data regression model profitability, RGDP growth, inflation and lending interest rate are found to be not powerful variables to influence liquidity risk of Ethiopian commercial banks in the test period. Generally, in this study bank specific variables have more significant effect than macroeconomic variables.