The Effect Of Liquidity And Profitablity On Operational Efficiency Of Private Commercial Banks In Ethiopia

Abstract

This study investigates the influence of liquidity and profitability on the operational efficiency of selected private commercial banks in Ethiopia. Using panel data from the period 2018/19 to 2022/23, the research employs a quantitative approach to analyze secondary financial data. A sample of ten private commercial banks was selected from a total of 30, using a convenience sampling method. The operational efficiency of these banks serves as the dependent variable, while independent variables include bank size, the ratio of liquid assets to total assets, loan-to-deposit ratio, return on assets (ROA), and return on equity (ROE).The analysis utilized a fixed-effects regression model to explore the relationships between the variables. The findings indicate that the loan-to-deposit ratio has a positive impact on operational efficiency. In contrast, the bank size and liquid asset-to-total-asset ratio do not exhibit a statistically significant effect on operational efficiency. The average operational efficiency of the selected banks is found to be 0.72, with a standard deviation of 0.0848, suggesting that there is a considerable variation in performance across the banks. The study concludes that, currently, many private commercial banks in Ethiopia exhibit low operational efficiency. To enhance their performance, the study recommends that banks focus on optimizing their loan portfolios to ensure sustainable earnings for stakeholders and Ethiopia’s loan policy and broader financial landscape are influenced by its economic reforms, political stability, and efforts to attract foreign investment. However, specific recommendations for Ethiopia's loan policy depend on the country's economic goals, challenges, and the needs of its population. Some general recommendations that could be considered: Enhance Access to Credit for Small and Medium Enterprises (SMEs, Promote agricultural financing, Strengthen Financial Inclusion, Address High Interest Rate Encourage Foreign Investment and Development Financing, Improve Loan Repayment Culture Focus on Sustainable and Green Financing. Furthermore, maintaining adequate liquidity, particularly through shortterm marketable securities, is crucial for achieving profitability and improving operational efficiency. This research provides valuable insights for policymakers and banking executives aiming to enhance the efficiency and competitiveness of the private banking sector in Ethiopia