Abstract:
This study investigates the impact of currency demonetization on the performance of Ethiopian
private banks over the period 2018–2022, with a particular focus on profitability, liquidity,
and credit risk. Using descriptive statistics and the Generalized Method of Moments (GMM)
estimation technique, the analysis captures both pre- and post-demonetization dynamics, with
2020–2022 marked as the post-demonetization period. The descriptive statistics reveal that, on
average, Ethiopian private banks remained profitable and maintained adequate capital levels,
though they faced moderate credit risk and macroeconomic volatility. The GMM estimation
results indicate that demonetization had a statistically significant and negative effect on bank
profitability, highlighting a decline in income sources due to disruptions in cash-based
transactions. Conversely, the liquidity position of banks improved slightly, possibly due to a
shift toward digital and mobile banking platforms. However, credit risk worsened, as reflected
by the increase in non-performing loans, likely driven by borrowers’ repayment difficulties
during the liquidity crunch. Among control variables, inflation and GDP growth were found to
increase credit risk and bank performance respectively, while interest rate hikes and currency
depreciation exerted downward pressure on profitability. Overall, the findings suggest that
while demonetization introduced certain digital banking opportunities, it also posed
considerable challenges to profitability and credit stability in the Ethiopian banking sector.
