DETERMINANTS OF LIQUIDITY RISK IN ETHIOPIAN MICROFINANCE INSTITUTIONS

Abstract

Studying determinants of liquidity risk in microfinance institutions (MFIs) in Ethiopia is important for several reasons: Liquidity risk refers to the ability of an institution to meet its financial obligations without incurring significant losses. If MFIs are unable to manage liquidity risk effectively, they may face financial instability or even bankruptcy. Hence, studying determinants of liquidity risk in microfinance institutions in Ethiopia is essential for ensuring financial stability, protecting client interests, promoting sector development, and aligning practices with international standards. This study examines the determinants of liquidity risk in Eleven Ethiopian microfinance institutions over the period 2009 to 2022. The study investigates the impact of eight independent variables, namely capital adequacy ratio, non-performing loan, lending interest rate, cost of fund, return on asset, rate of deposit, inflation, and gross domestic product, on liquidity risk. The regression analysis reveals that capital adequacy ratio, non performing loan, cost of fund, return on asset, and rate of deposit significantly influence liquidity risk in these microfinance institutions. However, lending interest rate, inflation, and gross domestic product do not exhibit a statistically significant relationship with liquidity risk. These findings provide valuable insights for policymakers and microfinance institutions in managing liquidity risk and ensuring financial stability.