The Effect of Asset Liability Management on the Liquidity Risk of Selected Commercial Banks in Ethiopia
Year: 2025
Type: article
Abstract: ALM is the ongoing process of formulating, implementing, monitoring, and revising strategies related to assets and liabilities to achieve an organization’s financial objectives, given the organization’s risk tolerances and other constraints. Liquidity risk is the risk that the bank will not be able to meet efficiently both expected and unexpected current and future cash flow and collateral needs without affecting either daily operations or the financial condition of the firm. The objectives of the study were to analyze the impact of asset liability management on the liquidity risk of selected commercial banks in Ethiopia. Seven commercial banks (one governmental and six private commercial banks) for fifteen years from 2004-2018 operating period were used in the study. Secondary quantitative data were used as sources of data from NBE record and report of each selected banks for the stated period. Panel fixed effect regression model of multiple regression model was adopted. The model was estimated by using liquidity risk measured by the ratio of net liquid asset to short term liability as dependent variable and eight asset liability management indicators as independent variables (profitability, capital adequacy, loan to deposit ratio, loan growth, and deposit growth, liquid asset to total asset ratio, income diversification, and bank size). R-squared statistics and the adjusted R-squared statistics of the model was 66% and 61% respectively. The association between liquidity risk and return on equity as measurement of profitability, loan to deposit ratio, loan growth, deposit growth, and ratio of interest income to total income was negative, whereas, the association between liquidity risk and the remaining variables (capital adequacy, ratio of total liquid asset to total asset and bank size) was positive. The significant variables were profitability, capital adequacy, deposit growth, loan growth, and bank size. On the other hand the ratio of total loan to total deposit, ratio of total liquid asset to total asset and income diversification measured by ratio of interest income to total income were not statistically related with the liquidity risk of selected Ethiopian commercial banks during the study period. The banks are advised to review their strategy on each significant variable to keep the desired level of liquidity position and enable to manage their liquidity risk. Specially, there should be tradeoff between the profitability and liquidity.
DOI: 10.20372/nadre:19332
Author: BIREGA MULUNEH
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W7084577635
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