Determinants of Commercial Banks Liquidity: Internal Factor Analysis

Abstract

This study was undertaken to explore the determinants of liquidity in Zimbabwean commercial banks. The research paper was motivated by the persistent high liquidity crunch currently be delving operations of commercial banks. An explanatory research design was adopted to find out variables that determine banks liquidity. An Ordinary Least Squares (OLS) model was developed after testing the variables for stationary to avoid spurious regression using the Augmented Dicker-Fuller (ADF) unit root test. Pearson’s correlation analysis was used to examine the existence of correlation between the repressors and the regressed. The study identified that non-performing loans are highly negatively related with banks liquidity signifying that this variable influence bank liquidity to a larger extent. A positive relationship between bank size and capital adequacy ratio and liquidity was established. Contrary to expectations a positive relationship was obtained between loan growth and banks liquidity. The following recommendations were made. Banks should devise robust credit risk management tools to reduce credit risk, tap into the offshore markets to obtain more credit to extent to their clients and the central banks should speed up the operation of ZAMCO which is meant to take over banks bad debts.