Impact Of Liquidity Management On Banks Profitability: A Case Study Of Selected Private Commercial Banks In Ethiopia

Abstract

The main aim of this paper is to assess impact of liquidity management on banks profitability. In order to fulfil the stated objective an exploratory research design with a quantitative data approach was used. To this end, the researcher took twelve years financial statement data of six private commercial banks of Ethiopia using purposive sampling method (namely Dashen Bank, Awash International Bank, Bank of Abyssinia, United Bank, Wegagen Bank and Nib International Bank) for the period 2002 – 2013. The study employed a multivariate regression model using Return on Asset (ROA) as a dependent variable for measuring the profitability of the selected banks and seven independent explanatory variables used as a proxy for liquidity measurement; ROA is profitability of private commercial bank (dependent variable) in this study measured by return on total assets to evaluate bank’s profitability. Current ratio (CR), Current asset to total asset ratio (CA.TA.R), Liquid asset to deposit ratio (LA.D.R), Current liability to total asset ratio (CL.TA.R), Cash balance (CB), Cash ratio (CA.R) and Loan to Deposit ratio (LDR) are independent variables which referred as explanatory variables. The study was done based on a balanced panel constructed ordinary least squares (OLS) and fixed effects model, the study finds that CA.TA.R and CL.TA.R have a negative and significant impact and CAR has a negative but insignificant impact on the profitability of private commercial banks of Ethiopia.