WOLAITASODO UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

SENIOR ESSAY PRESENTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR

THEBA DEGREE IN ACCOUNTING AND FINANCE

DETERMINANTS OF LIQUIDITY MANAGEMENT PRACTICE:

AN EMPIRICAL STUDY ON COMMERCIALBANKOF ETHIOPIA, WOLAITASODO -

DICHA BRANCH

ADVISOR: MR. SISAYG.

SUBMITTED BY: AKILILUAYELE.

ID NO ACC/WE/044/09

WSU
WOLAITASODDO, ETHIOPIA

January, 2020

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 Signed Declaration

I, AkililuAyele,hereby declare that the senior essay work entitled “Determinants of Liquidity
management practice: An Empirical Study on Commercial Bank of Ethiopia,
WolaitaSodo - Dicha Branch” submitted by me for award ofBA degree in Accounting and
Finance to the department of Accounting and Finance of Wolita Sodo University is my original
work and it has not been presented for the award of any degree, diploma or fellowship or other
similar purpose to any University or institution. Any work of other Authors used is dully
acknowledged.

Signature _________________

AkliluAyele

Date_____________________

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 Letter of certification
WolitaSodoUniversity
College of Business and Economics
Department of Accounting and Finance
This is to certify that the senior essay prepared by Aklilu Ayele, entitled: “Determinants of
Liquidity management practice: An Empirical Study on Commercial Bank of Ethiopia,
WolaitaSodo - Dicha Branch”and submitted in partial fulfillment of the requirements for BA
degree in Accounting and Finance complies with the regulations of the University and meets the
accepted standards with respect to originality and quality.

Signed by the Examining Committee:

Examiner (PhD/MSc/MBA)
SignatureDate .

Advisor (PhD/MSc/MBA)
SignatureDate .

__________________________________________________________________
Head Department of Accounting and Finance

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 ACKNOWLEDGEMENT
First of all I would like to thank the almighty God for everything he did for me. Next I would
love to give my deepest gratitude to my advisor, Mr. Sisay G, for his genuine advice, cooperation
and commitment through this research preparation process and for final senior easy writing
support too.

Afterwards I am deeply indebted to my family members for their continuous moral, material and
financial support. Finally, I would like to acknowledgethe workers at CommercialBank of
Ethiopia, Wolaita Sodo-Dicha Branch those provided the necessary documents and shared their
practical knowledge.

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Table of Contents
ACKNOWLEDGEMENT................................................................................................................i

Table of contents.............................................................................................................................ii

ABSTRACT...................................................................................................................................iii

CHAPTER ONE..............................................................................................................................1

1. INTRODUCTION......................................................................................................................1

1.1. BACKGROUND OF THE STUDY.........................................................................................1

1.2. Statements of the Problem....................................................................................................2

1.3 OBJECTIVES OF THE STUDY...........................................................................................3

1.3.1. THE GENERAL OBJECTIVES....................................................................................3

1.3.2. SPESIFIC OBJECTIVE.................................................................................................3

1.4. SCOPE OF THE STUDY.....................................................................................................3

1.5 LIMITATION OF THE STUDY...........................................................................................3

1.6 SIGNIFICANCE OF THE STUDY.......................................................................................4

1.7 Organization of the Paper......................................................................................................4

CHAPTER TWO.............................................................................................................................5

2. LITERATURE REVIEW............................................................................................................5

2.1 Definition of liquidity............................................................................................................5

2.1.1. Cash and cash-Equivalent..............................................................................................5

2.1.2. Marketable –securities or short-term investment...........................................................6

2.1.3. Short- term receivables...................................................................................................6

2.2. Liquidity management..........................................................................................................7

2.2.1. Cash management...........................................................................................................7

2.2.2. Management of short-term investment...........................................................................7

2.2.3. Short- term loan management........................................................................................8

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 2.3. Bank lending policies and procedures..................................................................................8

2.3.1. Regulation of lending.....................................................................................................9

2.3.2. Liquidity in bank............................................................................................................9

2.2.3. Source of demand and supply for liquidity....................................................................9

2.3.4 Bank liquidity problems................................................................................................10

2.3.5. Asset liquidity Management.........................................................................................10

2.3.6. Deposit service managements......................................................................................10

2.3.7. Reserve Requirements..................................................................................................12

CHAPTER- THREE......................................................................................................................14

3.1METHODOLOGY................................................................................................................14

3.2 Types and sources of data....................................................................................................14

3.3 DATA COLLECTION TECHNIQUES..............................................................................14

3.4 Sampling Technique............................................................................................................14

3.5 Data analysis........................................................................................................................14

CHAPTER FOUR.........................................................................................................................16

4. Data Analysis and Interpretation...............................................................................................16

4.1. Data from Questionnaires...................................................................................................16

4.2. Data from Interview............................................................................................................21

CHAPTER FIVE...........................................................................................................................25

5. Conclusion and recommendation..............................................................................................25

5.1 conclusions...........................................................................................................................25

5.2 RECOMADATION.............................................................................................................25

REFERANCE................................................................................................................................26

Appendix........................................................................................................................................27

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ABSTRACT
This study was designed to assess liquidity management practice in the case of CommercialBank
of Ethiopia, WolaitaSodo - Dicha Branch. The main objective of this study was to investigate, the
short-term loan collection policies and procedure, to identify the problem that the bank faces in
managing its cash and short-term receivables, and to assess the liquidity position of the bank.
Thereafter to improve liquidity management toward achieving its objectives and identify some
major problem in liquidity management practice in the bank. During research process different
research design and methodology of the study was undertaken using both primary and secondary
sources of data collection through questionnaires and interviews were used. Then data analysis
and interpretation have done. Finally, the easycome up with conclusion and recommendation to
the bank.

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v
 CHAPTER ONE

1. INTRODUCTION

1.1. BACKGROUND OF THE STUDY

The term liquidity is used to describe assets that are convertible in to cash. It has two
dimensions; the necessary to convert the asset into many or cash and the degree of certainly
associated with the conversion ration or price related for the asset. (C van Horn, 2005 p.429).

The problem associated with poor liquidity management have a significant effect on the real
economy as homeowners seeing their property value deteriorates, reduction customers access to
borrowing main higher cost of equity and debt for main street companies, and especially debt
capital and a lower demand for their products, unemployment goes up etc (Hej Pedersen 2005).

Decision made by bank to maintain sufficient liquid assets to meet the bank obligation to
depositors is called Liquidity management. It is needed by banks and other financial
intermediaries for the purpose of satisfying and other legal payment of liabilities which are
being due and other legal requirements as well as transaction in proper way and time. Bank and
other depository institution share liquidity risk, because transaction that include the following
reasons:

 The first reasons is providing short and medium term loans

 The second reason is they are engaged in buying and selling of negotiable
instrument and Securities issued by government.
 And the final reason is those saving accounts and deposits that records customer
balance of Cash or other assets which are customer in bank can be withdraw at any
time more than new deposit (Miller and Hoose).

This research assesses the current liquidity position of WolaitaSodo - Dicha Branch and also
gives suggestions and recommendation based on the finding on the study.

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1.2. Statements of the Problem
Liquidity is used to mean quickly an asset can be converted in to cash or liability paid. This is
liquidity refers to the nearness to cash’’ of economic resources and obligations. Information
about Liquidity is important in evaluating the timing of cash flow in near future and is parts of
total cash flow. Furthermore, a company’s needs short term cash inflows to take advantage of
new investment opportunities and to meet its short term obligations. Cash and similar assets are
called Liquidity assets because they are converted easily in to other assets or used to pay for
services or liabilities. A company needs liquid asset to operate, so that for example, bill are paid
on time purchase are made when necessary ( johnj. will 200p:150)

The problem that a bank faces in its liquidity management may raise due to the poor
management of its liquidity position i.e. when it fails to manage it properly and its actual
performance. The other problem which associated with the banks liquidity management is its
credit risk which may raise due to its poor management of the liquidity which may in turn
discourages the bank to provide is loan sufficiently. The combined effects of the above problems
result in the stoppage of the service operation of the bank because unlike other institution, it
absolutely relies on the liquid assets such as cash and loan receivables what we need for the
following purposes:-
 We need it to pay for goods and service and ordered. Even if your electricity supplies
allow time to pay, you must eventually hand over cash for electricity consumed. Such
payments are part of our normal day- by- day transactions.
 It is wise to maintain an emergency cash float in case same thing unexpected happens.
Such a precautionary balance may be required for expenditure on wedding presents, or to
pay an unexpected car repair bill.
 Business also needs liquidity to meet normal transactions expenditure on wages,
materials, expense and taxes, and as a precaution to deal with uncertainty of their cash
flows. Any cash held in excess of transaction and precautionary requirements is wasteful
unless it is haled to meet same planned expenditure, such as impending plant replacement
or taxation.(Geoffrey knott 4th edition)
 .cash and similar assets are called Liquidity assets because they are converted easily in
the study will find the solution for:

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To assess the short –term loan collection policies and procedure?

-To identify the problems that the Bank faces in managing its cash and
Short –term receivables?
- To assess the liquidity position of the bank?
- To give some constructive suggestion and recommendation based on the finding of
the Study?

1.3 OBJECTIVES OF THE STUDY

1.3.1. THE GENERAL OBJECTIVES
The general objective of the study would be to assess liquidity management practice of the
Branch bank under the study.

1.3.2. SPESIFIC OBJECTIVE

In addition to the above general objectives the study would have the following specific
objectives:

 To assess the short –term loan collection policies and procedure.

 To identify the problems that the Bank faces in managing its cash and short –term
receivables.
 To assess the liquidity position of the bank.

1.4. SCOPE OF THE STUDY

It would be difficult to include each and every recording and managing system of the bank.
Because of this research paper were cover the past 3 years, it cover from (2009-2011)
CommercialBank of Ethiopia, WolaitaSodo - Dicha Branch..

1.5 LIMITATION OF THE STUDY

The following difficulties may be faced while conducting the study:

 Lack of sufficient reference material.

 Lack of budget to conduct the research as much as it needed.
 Lack of experience to conduct effectively.
 Lack of enough time to conduct the study effectively.

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1.6 SIGNIFICANCE OF THE STUDY
This study is believed to have the following significant to the bank and future researchers: It
would suggest some possible solution to the problem faced by branch that enables to improve its
liquidity management. It would act as starting point for other researchers who would like to
conducts research on the same one. It can advise the management on formulating different
system of increasing liquid asset.

This study also would be useful to show that the strong and weak points in liquidity management
at the branch in particular .Therefore, the bank to act on its weakness and maintain strengthen the
institution (the bank) would use the result come out from this research finding and also the
researcher believe that result of the study would help interested reader to have good
understanding about liquidity management in Wolaita Sodo - Dicha Branch

1.7 Organization of the Paper

This paper would consist of five chapters. The first chapter is an introduction part includes; back
ground of the study. statement of the problem, objective, significance, a scope and limitations of
the study, chapter two contains review of literature and chapter three would contains research
approaches types and source of data, data collection technique, sampling destine and data
analysis. And chapter four would be contains data analysis and the last chapter would contains
conclusion and recommendation.

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 CHAPTER TWO

2. LITERATURE REVIEW
2.1 Definition of liquidity
According to Nikolai and Bazle (2001.p:56):- stated liquidity is used to how quickly an asset can
be converted into cash or liability paid. That is liquidity refers to the” nearness to cash” of
economic resources and obligations. Information about liquidity is important in evaluating the
timing of cash flows in near future. Information about short term cash inflows are part of total
cash flow. Furthermore, a company needs short term cash inflows to take advantage of new
investment opportunities and to meet its short term obligations. Liquidity is also one aspect of a
company’s flexibility.

All assets can be judged on their liquidity. Cash and similar assets are called liquid assets,
because they are converted easily in to other assets or used to pay for services or liabilities. A
company needs liquid asset to operate .So that, for example, bills are paid on time and purchase
is made when necessary (John J. wild 2000; p: p: 150)

Cash or other assets that are reasonably expected to be realized in cash or to be sold or
consumed within one year as one operating cycle of the business whichever is longer are called
current assets.(Larson and milar.1992;p:150).

The operating cycle of business is the average period of time between its acquisition of
merchandise or raw materials and realization of cash from the sale of merchandise or the sale of
the product manufactured from the raw material.(Larson Miller, 5th ed ,p:293).

2.1.1. Cash and cash-Equivalent

Accountants define cash as money on deposit in banks and any items that banks would accept for
deposit. These items include not only coin and paper money, but also checks, money orders and
travelers’ checks .Banks also accept draft signed by customers using credit card such as visa and
master card. Thus, sales to customers using bankcards are cash sale not credit sales.

Some short term- investment is so liquid that they are termed cash equivalents. Examples include
money market funds, us treasury bills and high- grade commercial papers (very short-term notes
payable issued by large credit worthy corporations). Those assets are considered as to similar to

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cash that they are combined with the amount of cash in the balance sheet. Therefore the first
asset listed in the balance sheet usually is called cash and cash equivalents. (Bringham, 1995;
p.700).

2.1.2. Marketable –securities or short-term investment

The next most liquid group of asset and those the next category presented under current assets
consists of short-term investment. According to statement of financial accounting standards
no.115,Accounting for certain investment in debt and equity securities at the time of acquisition,
dept and equity securities must be classified as trading, available for sale or held to maturity.
Trading securities, which are securities that have been bought and held. Principally for purpose
of selling them in the near term, are always are included in short –term investment. In addition,
available for sale security that are expected to be sold in next year or operating cycle, which over
longer should be reported as short-term investments. Trading securities and available for sale
securities are reported as at fair-value, and held to –maturity securities, which are dept
instrument, are reported at amortized cost.(G. chasten, E.F lahery and C.O connor,1995;p:2010)

2.1.3. Short- term receivables

Short-term receivables are claims to cash that are expected to be exercised within one year or
operating cycle, whichever is longer. They often constitute a significant portion of current assets.
In our credit based society, a firm credit and collection policies have significant influence on
profitability. Trade receivable result from sales of good or service on accounts.

For example, a routine credit sale of inventory to a customer creates a trade receivable. That is, a
company sale good or service in exchange for a promise from a customer to pay according to
specified terms. Non-trade receivables arise when company lends money on a short on short-
term basis. Usually non-tradable receivables are supported by a formal contractual agreement
specifying the terms of repayment and are called notes-receivable value, which is the amounts of
cash expected to be collected. Net realized value is the difference between the gross amount of
receivables and anticipated uncollectable accounts; discounts, and returns and allowances.
(G.Chasten, E. flahery and C.C’ connor,1995;p:201-202).

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2.2. Liquidity management
Liquidity management is decision made by bank to maintain sufficient liquid asset to meet the
bank obligation to depositor.

2.2.1. Cash management

The term cash management refers to planning, controlling and accounting for cash transaction
and cash balance. Because cash moves so readily between cash accounts and other financial
assets, cash management really means the management of all financial resource. Efficient
management of these resources is essential to the success- even to the survival of every business
organization. The basic objectives of cash management are as follows:

 Provide accurate accounting for cash receipt, cash disbursement and cash balances.
Many of total transaction of business involve the receipt or disbursement of cash.
Also cash transactions affect every classification within the financial statement
assets, liabilities, owner equity, revenue and expenses. If financial statements are to
be reliable, it is absolutely essential that cash transaction be recorded correctly.
 Prevent or minimize losses from theft or fraud. Cash is more susceptible to theft than
any other assets, therefore requires for physical protection.
 Anticipate the need for borrowing and assure the availability of adequate amount of
cash for conducting business operation. Every business organization must have
sufficient cash to meet its financial obligations as they come due. Otherwise, its
creditors may force the business in to bankruptcy.
 Prevent unnecessary large amount of cash from sitting idle in bank accounts that produce
no revenue. Well managed companies frequently review their bank balance for the
purpose of transferring any excess cash in to cash- equivalents or other investments that
generate revenue. ( macdonald, 2002, p. 109)

2.2.2. Management of short-term investment

Are any securities that bought and sold in the primary and secondary security markets?
These securities are reaching to maturity within one year and are noted for their low risk
and ready marketability. These securities are considered appropriate investment in the
current asset management of non-financial corporations. Investment such as Treasury bill
commercial paper, negotiable certificate of deposits federal agency securities bank

7
 acceptance and money market mutual fund are suitable as short-term or temporary
investment alternatives.

Treasury bills, commonly referred to as T-bills are the direct obligation of the state
government. Bill is particularly attractive to bank because of their high degree of safety.
Bills are supported by the taxing power of the federal governments; their market prices
are relatively stable and they readily marketable. Bills as are issued and traded at
discount from their par value without promised in to rest rate.

The minimum purchase size of T-bills is $10,000. New issues of T-bills are hold by
states treasury and are available in three original maturities: 91 days and 52 weeks other
maturities can be obtained by previously issued T-bills in the resale markets. They yield
the smallest rate of return among short-term investment because they have no default risk
the short term maturities of T-bills serve to minimize interest rate risk. Because of T-bills
daily contain no default risk and very little interest rate and market risks, they are often
called risk and very little interest rate and market risks; they are often called risk free
securities.(Neveu,1985,p.179-181).

2.2.3. Short- term loan management

It is one of the major functions; which financial institutions undertake for proper
mobilization of funds. Its function also includes loan and advances. Safety of financial
institutions loan and advance is taken and condition on which the loan will be made
available.

2.3. Bank lending policies and procedures

Theprincipal reasons banks are chartered by state and federal authorities are to make
loans to the customers. Marketing loan is principal economic function of banks to fund
consumption and investment spending function has great deal to do economic health of
the region because bank loans support the growth of new business and jobs within the
banks and promote economic vitality. (Rose, 1999, p.117).

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 2.3.1. Regulation of lending
 The loan portfolio of any bank is heavily influenced by regulation because the
quality of the bank loan has more to do within risk and safety any other aspects of
the banking business. The quality of banks loan portfolio and the soundness of
the lending policies are the areas federal and state bank examiner look at most
closely when examining a bank. (ROSE, 1999, p.522-524).

2.3.2. Liquidity in bank

Bank liquidity thus has two faces: the capacity to meet deposit withdrawals and the
capacity to satisfy those who need to borrow money. Depositor which withdrawals are
seldom a problem. Liquidity crises instead involve scramble to find fund for borrowers.
Liquidity management involves both the selection of prudent amount of liquid assets and
the developments of reliable expandable liabilities.

2.2.3. Source of demand and supply for liquidity

For most banks pressing demand for expandable funds come from two sources.

i. Customer withdrawing money from deposits

ii. Credit request from customers the bank wishes to keep either in the form of new
loan request, renewal of expiring loan agreements or drawing up on existing
credit lines.

Other source of liquidity demand include paying off obligations arising from bank
borrowing ,such as loan in bank may have received from other banks or from the central
bank’s stock holders periodically give rise to demand for immediately expandable cash.

To meet the foregoing demands for liquidity banks can drawl up on several potential
source of supply. The most important source is receipt of new customer deposits both
from newly opened account and from new deposits placed in existing accounts. Another
important element in the supply of bank liquidity comes from customer repaying their
loans which provide fresh funds for meeting new liquidity needs as do sales of bank asset
especially marketable securities from the bank investment portfolio. Liquidity also flows
in revenue generated by selling non-deposit service and borrowing in the money market.
(Rose, 1999, p.349).

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 Liquidity has a critical dimension some bank liquidity need are immediate or nearly so
longer time liquidity demands rise from seasonal cyclical and trend factors. Timing is
critical to liquidity management bank must plan carefully how; when, and where needed
liquidity fund can be raised.

2.3.4 Bank liquidity problems

Most liquidity problems in banking arise from outside the banks as a result of the
financial activity of its customer. In effect, customer´s liquidity problems gravitate
toward their banks.

The essence of the liquidity management problems for bank described as:

i. Rarely are the demands for bank liquidity equal to the supply of liquidity at any
particular moment in time. The bank must continually deal with either a
liquidity deficit or a liquidity surplus.
ii. There is a trade-of between bank liquidity and profitability. The more bank
resources are tied up in readiness to meet demands for liquidity; the lower is
that bank´s expected profitability.

2.3.5. Asset liquidity Management

The oldest approach to meeting bank liquidity needs is asset liquidity in the form of
holdings of liquid assets pre dominantly in cash and marketable securities. When
liquidity is needed selected asset are sold for cash until all the bank’s demand for cash
are meet. This liquidity management strategy is often called asset conversion because
liquid fund are raised by converting non-cash in to cash. Mainly smaller banks that find it
a less risky approach to liquidity management than relying on borrowings use this
strategy. But asset conversion is not a cost-less approach to liquidity management.

2.3.6. Deposit service managements

Deposits are the foundation up on which banks thrive and grow. They are unique item and banks
balance sheet distinguishes it from other types of business firms. The ability of banks
management and staffs to attract customer is an important measure of banks acceptance by the
public. Deposits provide the raw material from the bank loans and represent the ultimate source
of bank profit growth. Deposit generates cash reserve and it is out of the excess cash reserve a
bank holds that new loans are credited. Good indicator of management effectiveness in any bank

10
are whether or not deposited funds have been raised at the lowest possible bank wished to make.
(Rose, 1999, p.387).

Major Categories of Deposits Offered by Banks

A. Transaction (payment)deposit
i. Demand deposits – are transaction accounts that are held by
individuals’ partnerships, corporations and government. Which do not
earn an explicit interest payment but provide the customer with
payment service safe keeping of funds and record keeping for any
transaction carried-out by check and to withdraw cash on demand?
Demand deposit are among the most volatile and least predictable of
banks sources of funds with the shortest potential maturity because they
can be withdrawn without prior notice.
ii. Interest –bearing demand deposit are transaction accounts that provide
all of the foregoing services and pay interests to the depositor as well.
These deposits include negotiable order of withdraw (Now) accounts
and automatic transfers (ATS) and money market deposit accounts
(MMDAS).
B. Non-transaction (saving or Thrift): deposit saving or thrift deposits are
designed to attracts funds from customer who wish to set side money in
anticipation of future expenditures of financial emergencies. These deposits
higher interest rates than transaction deposits do. While their interest cost is
higher, thrift deposit are less costly for a bank to process and to manage.

Types of non-transaction deposits

i. Passbook saving accounts: Passbooks saving accounts were

traditionally the stable deposit of saving banks and saving and loan
associations.
Despite the relatively low interest rates banks and thrifts pay on passbook
accounts and the greater the convenience and higher returns available on

11
 saving certificates (small –denomination fixed maturity time deposit),
most customer continue to hold on their on to their passbooks.
ii. Time deposits: - time deposits are defined as any deposit in bank account
that can be withdrawn before specified date or without advance notice.
Time certificates of deposits are offered in various denominations and
varying maturities. A time deposit cannot be withdrawn for at least seven
days after it is made. If it is withdrawn before that or before maturity of
the time deposit contract an interest penalty is charged.
Individuals and business have offered time deposit which carries fixed
maturity dates (usually covering 30, 60, 90 and 180 days) with fixed
interest rate. (Friedman, 1998, p.62).

2.3.7. Reserve Requirements

Directive numbers SBB/37/2004 statutory reserve requirement, which obligation banks to hold a
proportion of their deposit balance with NBE is one of the important monitory policy instrument
and prudential regulation tools: whereas, a bank operating in Ethiopia currently has one reserve
account with the NBE which is used to carry out day-to-day settlement of transactions through
the NBE and to maintain statutory reserve balance.

Banks operating in Ethiopia shall two separate birr accounts with the NBE of be used a reserve
account and payment and settlement account.

A reserve account: shall exclusively be used of maintain the reserve balance. Any bank operating
in Ethiopia shall at all time maintain in its reserve account 5% of all birr and foreign currency
deposit liability in the form of demand deposits, saving and demand deposits.

A payment and settlement account: shall be used to carry out all day-to-day transaction of banks
through the NBE

3. Determinants of Bank Liquidity

Although liquidity problems of some banks during global financial crisis re-emphasized the fact
that liquidity is very important for functioning of financial markets and the banking sector, an
important gap still exists in the empirical literature about liquidity and its measuring. Only few

12
studies aim to identify determinants of liquidity. The liquidity ratio as a measure of the liquidity
should be dependent on following factors (estimated influence on bank liquidity in parenthesis):
This the above described literature review and other relevant to the study are additionally
included in the final research paper.

 Probability of obtaining the support from lender of last resort, which should lower the
incentive for holding liquid assets ,
 interest margin as a measure of opportunity costs of holdingliquid assets ,
 bank profitability, which is according to finance theory negatively correlated with
liquidity ,
 loan growth, where higher loan growth signals increase in illiquid assets ,
 size of the bank , Current deposits (CA) and Savings deposits,
 gross domestic product growth as an indicator of business cycle , and
 short term interest rate, which should capture the monetary policy effect .
The liquidity ratio as a measure of bank’s liquidity assumed to be dependent on individual
behavior of banks, their market and macroeconomic environment and the exchange rate regime,
i.e. on following factors:
 total assets as a measure of the size of the bank ,
 the ratio of equity to assets as a measure of capital adequacy,
 the presence of prudential regulation, which means the obligation for banks to
be liquid
( AIMA Journal of Management & Research, May 2013, Volume 7 )

13
 CHAPTER- THREE
3.1METHODOLOGY
This research mainly focuses only in liquidity management practice of the bank under the study
and it would be conducted for analysis, interpretation and discussion of the data manner that
would be suitable for other research analysis.

3.2 Types and sources of data

This study would use both primary and secondary data in order to obtain adequate and full edged
data. Primary data would be collected by using questioner and interview distributed to all
employee and managers of Commercial bank ofEthiopia- Wolaita Sodo Dicha Branch.
Secondary data would be gathered from written documents and manuals of the bank and internet
services.

3.3 DATA COLLECTION TECHNIQUES

The data collection tools selected for this study would be both primary and secondary data. The
type of data what the researcher collected by distributing questioner to the employees and by
conducting interview to the managers is quantitative and qualitative in nature whereas the data
obtained from secondary sources have only quantitative nature.

3.4 Sampling Technique

To acquire relevant information the researcher selects purposive sampling technique. Because
the researcher believe full information about the problem obtained from the individual who are
related with the liquidity management area. For seeking of accurate and sufficient information,
more experienced workers of the branch can recognize the problem and provide necessary
information. By using this technique individuals who are be lived to have expertise, knowledge
and familiarity with related of communication between manager and workers, they could provide
enough information .form target population 20 all of them are considered under sampling size,
in percentage, 100% is included under the study.

3.5 Data analysis

After the data would be collected from data sources they would be presented and shown in easily
manner. Using tables tend comparison in order to make the data collection more favorable. Each
item of the table would interpreted and discussed independently by applying qualitative method

14
of search the pattern of relationship that exist among the data group the following technique of
statically method and procedures may employed.

The data would be organized in tabular forms interims of number as well as percentage of
respondents selected each responses option apparent in each item of the questionnaire.

The tender should Not bothered about the same of frequency or percentage because for certain
items. Responds may allowed to select one or more options they through appropriate.

15
 CHAPTER FOUR

4. Data Analysis and Interpretation

This chapter deals with the analysis and interpretation of data collected from respondents though
questionnaires, interview and annual financial statement. The respondents to questionnaires are
the employees of Commercial bank ofEthiopia- Wolaita Sodo Dicha Branch. Interviewalso
conducted with the general managers of the bank and annual financial statements from written
documents to.

Regarding to questionnaires, the researcher produced a total of 20 questionnaires and has got 16
responded papers. The remaining 4 papers did not return back. Due to this fact, the researcher
tried to analyze 16 questionnaires. Interview also take place with general Managers of the bank,
are properly field and returned back.

4.1. Data from Questionnaires

The total population sample on which the study is conducted is 20 which represent
questionnaires from that are 80% of total questionnaires are returned to back that were
distributed to the employees of Commercial bank ofEthiopia- Wolaita Sodo Dicha Branch.

General Information of Respondents

Table 4.1. Age Distribution of Respondents

Respondents
Age group Number Percentage (%)
20-25 6 30%
25-30 10 50%
30-35 4 20%
Total 20 100%
Source Survey (2013)

As can be seen from table 4.1. 30% of employees, who works in Wolaita Sodo Dicha Branch. are
found between the ages of 20-25. The employee found at the age range of 25-30 constitutes 50%
and the reaming 20% of respondents, were found between the ages of 30-35 year range.

16
Table 4.2. Sex Distribution of Respondents

Respondents
Sex Number Percentage (%)
Male 13 68%
Female 7 7 32%
Total 20 100%
Source Survey (2013 E.C )

The above table shows female employees in the bank cover 32% of all respondents and the
reaming 68% of the respondents are males. This employees that from the total respondents the
number of males insubstantially greater than the number of female.

Table 4.3. Educational Profile of the Respondents

Respondents
Item educational level Number Percentage (%)
Diploma 4 20%
Degree 16 80%
Certificate - -
Above first degree - -
Total 20 100%
Source Survey (2014)

Table 4.3 present educational information of the respondents. As indicated in the table (regarding
educational status) the majority 80% of the employees are degree holders, while the remain 20%
are graduated with Diploma.

Table 4.4 Area of Specialization

Respondents
Area of specialization Number Percentage (%)
Economics 3 15%
Business Administration - -
Management 5 25%

17
Accounting 12 60%
Total 20 100%
Source Survey (2013)

The above table presents area of specialization. The respondents’ response shows that the 60%
are specialized in area of accounting. And 25% are specialized in area of management and 15%
are specialized in Economics.

Table 4.5 Year of Experience

Respondents
Year of Experience Number Percentage (%)
Below 2 year 2 10%
2-5 year 16 80%
6-10 year 1 5%
Above 10 year 1 5%
Total 20 100%
Source Survey (2013 EC)

According to table 4.5 the majority of the respondents, 80% are found from 2-5 year of
experience. Also 10% are below 2 year and the remaining 5% 6-10 years and respectively.
Therefore 5% is above 10 years of on the bank activities. From this back ground we can say that
most of the employees are well experienced and can be judged as knowledgeable about the bank
activities.

Table 4.6 Examination of Problem to Pay Liability

Respondents
Item Number Percentage (%)
Does often bank face problem to pay liabilities those were
due?
Yes 13 68%
No 7 32%

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Source Survey (2013 E.C)

As can be observed from table 4.6 respondents are concerned about the past experience of the
bank on happening of problem with regarded to payment of its liabilities. For these questions
68% of employees replied “Yes” and the other 32% respond “No”.

Table 4.7 Physical Count of Cash in the Bank

How does your bank take physical count of cash? Respondents

Number Percentage (%)
Daily 19 95%
Weekly - -
Monthly - -
Annually 1 5%
Total 20 100%
Source Survey (2013)

As can be observed from table 4.7 employees are asked about physical count of cash that
practiced in their bank. 19 of the respondents replied that physical cont of cash is under take
daily. And the reaming 1 of the respondents replied that physical count of cash is undertaken
monthly.

Table 4.8 Offering of Training Liquid asset control system to employees

Does your bank give training about liquid asset control system to Respondents
employees Number Percentage (%)

Yes 6 30%
No 14 70%
Total 20 100%
Source Survey (2013)

As can be seen in table 4.8 70% of respondents replied that they don’t or never took training, this
implied that the bank arranged training few of the employed which is so important for the bank

19
to love the good liquid asset control in bank, And they remain 30% of respondents replied that
they took the training given by the bank.

(4) According to the information collected from the employees of Commercial bank ofEthiopia-
wolaita sodo Dicha Branch, through questioner. The procedures a bank follow up to issue and
collected its short term loan are as follows.

- Presentation that include names, address, purpose of loan, period of payment and types of
loan.
- Various evidence like risibility study relationship of the customer’s renewed financial
statement ownership evidence and profile of managements.
- Estimates values of collaterals presented to ascertain its fitness.

The above points show the procedure followed up a Wolaita Sodo Dicha Branch. to issue and
collect its short-term loans. Such as the procedures regarding the date of collection of its
principal amount and interest on a short term loan, it a loan is issue on interest, the issuance of s
short term loan both interest and discount. It also tells us the determine criteria of the rate interest
and discount on their loan and so on.

(5) According information conducted through questionnaire the policies that a bank uses to
collect its short-term loan are related to compliance polices, this policies is declared policy of
this Dashen bank to comply with letter and intent of all applicable lows of the central bank of
Ethiopia and of the state and regulations promulgated there under. This policy is specifically
intended to include all facts of the granting of credit and making loans, the handling and
processing of credit and making loans, the handling and processing of credit applications credit
inquires, information concerning interest rates, credit terms and costs, earnings and penalties on
loans and all other requirements of the central bank of Ethiopia.

(6) According to the information collected from the employees of Wolaita Sodo Dicha Branch.
through the questioner, the problems a bank faces in managing cash and short-term receivable
the problems regarding the uncollectability of the receivables and allowances and bed debt
expenses the bank faces when it expects this receivables are operated to be uncollectable.

20
Regarding the management of cash, sometimes a bank faces defilation of cash due to the errors
and founds committed by accountants and other workers those who perform the cash oriented
activities.

As the above explanation indicates, it tells us the problem associated with the management of
cash and short-term receivables. i.e. the bank faces a problem regarding the mismanagement of
which is related to the misstatement of short-term receivables it faces the problem associated
with the uncollectability of receivables and launches and bed debt expense it faces to those un
collectability.

(7) According to the information collected from the employees of Wolaita Sodo Dicha Branch.
through questioner, the positions or rules adopted by a branch to manage its liquidity are:-

1stconsideration of its liquidity position. That means when there is higher amount of current asset
in their bank, they invest their sufficient cash in to other capital that means, and they lend some
of their cash to other financial institution or to their customer.

- As per respondents response, the reason behind to invest their many to present loss
caused by handling excess cash in their bank.

2nd consideration of both the borrower’s capacity to pay and the banks liquidity position.As they
said that, when we invest our excess cash in other capital, we take in consideration both the bank
liquidity position and the borrower capacity to pay obligation due.

As it shows in the above explanation, it tell us the positions or rules adopted by Wolaita Sodo
Dicha Branch. regarding management of its liquidity position to determine the amount which has
to be lend, and the borrowers capacity to pay back and etc.

4.2. Data from Interview

The following interview questions are asked to mangers of Commercial bank ofEthiopia- wolaita
sodo Dicha Branch on the researcher. The interview held almost 3 hours, the researcher selected
them because they are the most important body for my study.

21
 (1) According to the information conducted with the general mangers of Wolaita Sodo Dicha
Branch. through interview, he said that, there are internal and external factors for the
problem of loan to exist. From internal factor some of the cause are:-
- Extending loan without sufficient study.
- Dislocation of loans by borrowers
- Incompetency of the organization management and
- Unwillingness to pay the debt.

The External Factories includes:-

- Unexpected market computation

- Inflation
(2) General Managers of Wolaita Sodo Dicha Branch. said, that, there are some criteria to get
short term loans. There are as follow:-
- Making available the necessary documents required by bank like audited financial
statement.
- Should have permanent address of business area.
- Having account in the branch.
- Trade licenses and
- TIN number

According to the information collected from mangers of Wolaita Sodo Dicha Branch. through
interview the criteria medium term loan legible collaterals according to the Bank those include
bank guarantee.

 Letter payment approved by national bank of Ethiopia.

 Residual building, in the form of collateral
 Merchandise.

With regarding to individual customers, to the bank regulates and evaluates their Name, address
and purpose of Loan period of payment and type of Loan and also collateral Level system

22
4.3 Annual Report of Wolaita Sodo Dicha Branch. The Dicha Bank uses. The ration analysis
which indicates the liquidity positions of the bank. From which the bank uses to show his
liquidity position, the principal one is current ratio.

Current Ratio is the ratio of current assets to current liabilities this comparison indicates how far
the currents assets cover the current liabilities and establishes the ability of an enterprise to meet
its short term or current obligations.

The Ratio is worked out by dividing the current asset by the current liabilities and is calculated
as follows:

Currents Ratio, = current asset

Current liabilities

Current assets represent those assets which can be in ordinary course of business, used up or
converted in to cash within a short period of time normally not exceeding one year. Whereas
current liabilities are short-term maturing obligations to bee meet with in a period of 12 months
from the dose of Balance sheet or during the operating cycle.

Current ratio= current assets

Current liabilities

Year 2009 2010 2011

Current asset 56184440 59.061877 60053113
Current liabilities 28.592.220 29029931 29530938
Current ratio 1.96 2.0 2.0
Source: annual report of Commercial bank of Ethiopia- wolaita sodo Dicha Branch

23
As we observed in the above table 4.9 the current ratio of the bank is greater than 1(one) which
indicatives that it is in the good position as fulfillment the general rule that states is better if the banks
current ratio is above one 1(one) the bank is in a good position

Year (A) (B) Liquidity (C)Primary (D) Required (E) (F) Actual (G) Total
E.C Liability requirement Reserve secondary Actual secondary reserve
10% reserve primary ETF
research
2009 28.592220 56184440 2859222 4288833 699259 208285 907554
2010 29029931 59061877 2902993.1 4354489.65 745707 452309 1198016
2011 29530938 60053113 2953093.8 4429640 868787 279571 1148358
Source: annual report of Commercial bank of Ethiopia- wolaita sodo Dicha Branch Actual primary
reserve “E” cash on hand + Reserve with NBE Actual secondary reserve “F” Deposit with local bank +
treasure bank.

- As indicated in table 4.10 in the year (starting from 2009-2011) bank use c=primary reserve
required 10% 2914 and b= secondary reserve required 15% calculating w/c is made depending
on the rule drafted by NBE.

But in the year 2011 the bank starts to use 15% and 20% for calculating c and D respectively. As a result
of new rule implemented by the national bank of Ethiopia (NBE)

As can be seen from table 4.10 the bank have not a liquidity problem it is to say that the bank
adequately fulfill the liquidity requirements more than expected in both primary and secondary reserve
requirements.

It is also clearly observed that, in most of the years the bank held sufficient liquid asset in both primary
and secondary reserve. In the year 2011 the branch did not calculate the liquidity performance. Because
of their work schedule or time mismatch with the main branch of the bank.

24
 CHAPTER FIVE

5. Conclusion and recommendation

5.1 conclusions
To conclude the result of the study, which are collected have been analyzed and interpreted within the
boundary of constraints. So the issues addressed in this study are shortly concluded in the following
presentation.

The main objective of this study is to find out the effect of liquidity management through assessment of
liquidity assets management and liability as well as other obligations those can of Source: annual report
of Commercial bank of Ethiopia- wolaita sodo Dicha Branch of affect liquidity performance. In doing
so, the study tried to present and analyze data have been gathered through primary and secondary
sources, with respect to most liquid assert, cash management among the items of cash asset, cash on
hand been increasing every the past 5 years except that year (2011) and that have positive impacts on
bank liquidity performance.

The major sources of finance for the bank are its shareholders investment and customer depots. And the
bank use this in short term investment and also giving loans to customers. Regarding loan the bank has
problems that arise because of internal and external factors that decrease the liquidity performance of the
bank.

With regarded to fulfilling minimum requirement the bank had no problems, rather the bank liquidity
assets both primary and secondary reserves had been excess in all the years.

5.2 RECOMADATION
Based on the data finding and conclusion made the following recommendation are made.

 In order to minimize the rate of existence of loan problem, it is advisable to focus on internal
factors, controllable like under taking more respondents and sufficient study before extending the
loan. In addition making supervision on the working conditions of the borrower and consulting
them not to default on continuousbasis.

25
REFERANCE
Annual report of Source: annual report of Commercial bank of Ethiopia- wolaita sodo Dicha
BranchSource: annual report of Commercial bank of Ethiopia- wolaita sodo Dicha Branch

bank (2009-2011)

Bringahm E.F.(1995):fundamental financial management (7th ed):the Dryden press:U.S.A

G. Chasten flaherty and o connor (1998): intermediate accounting (6 thed):McGraw –hill

company :U.S.A

nd mac association, washingtond.c

Hughes j.e and mac donalds.b (2002): international baking adds in weskey: bosten

larson and millar (1992):fundamental accounting principle (5thed)

Miuller and van hoose (1985):money banking and financial marckts

Neveu R.P (1985):fundamental of managerial finance (2nded);mc graw –hill companies

Rose p.s(1999):commercial bank management (4thed);mc graw-hill companies

26
 Appendix
WPLAITA SODO UNIVERSTY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

Questioners to collect primary data which are designed to employersof Commercial Bank of Ethiopia
WolaitaSoddo - Dicha Branch.

I am under graduating student in Wolaita Sodo University, School of business and economics,
Department of Accounting and finance. Currently I am undertaking a research entitled “Determinants of
Liquidity management practice: An Empirical Study on Commercial Bank of Ethiopia Wolaita Soddo -
Dicha Branch”. It is obvious that the objective of this study could not be realized without your true and
honest corporation by responding this questioner. Therefore, I kindly request you to fill all the questions
based on your understanding and knowledge.You can use X or mark to select your choice.

(1) Specify your sex please. Male Female

(2) What is you educational level?

Level for certificate College Diploma First Degree Second degreeOther

(3) Area of specialization

Economics Accounting Business administrationManagement Other

(4) Year of Experience

Below 2year 2-5 year 6-10 year above 10 years

(5) How often does receivable of short –term account

Daily Weekly monthly Quarterly Semiannually Annually

(6) How often bank face problem to pay Liabilities those were matured to due ?

Daily Weekly monthly Quarterly Semiannually Annually

(7) How often does your bank take physical count of cash?
27
 Daily Weekly monthly Quarterly Semiannually Annually

(8) Is there any situation that allow issuance of liquid asset without approval

Yes No

(9) Does your bank give training about Liquid assets control system to employees?

Yes No

(10) Is there regulatory mechanism to control appropriate Liquidity Position?

Yes No

(11) If your answer ‘yes; what are the reasons for absence of those mechanism____________________

(12) If your answer is No what are those mechanisms_________________________________________

(13) What are the policies that associated with the collection of short-term loan?
______________________________________________________________

__

(14) What are the produces that should be followed in the collection of short-term loan?
_________________________________________________________________

(15) What are the problems that the bank faces in managing cash?
______________________________________________________________

______________________________________________________________

(16) What are the problems that the bank faces in managing short-term receivable?
______________________________________________________________

28
(17) What are the liquidity positions of the branch? _________________________________

_______________________________________________________________

(18) What are the constructive sup potion and recommendation base on finding of the study?

______________________________________________________________________________
__________________________________________________________________

(19) List the liquidity management practices that the bank implementation in relation to legal issue.

______________________________________________________________________________
__________________________________________________________________

(20) List the short –term loan collection policies and procedure, please.

______________________________________________________________________________
______________________________________________________________________________
________________________________________________

(21) List the Problems that the Bank faces in managing its cash and receivables, please.

______________________________________________________________________________
__________________________________________________________________

(22) Pleaseexplain Liquidity position of the bank at least for the following 3 years.

2009__________________________________________________________________________
__________________________________________________________

2010__________________________________________________________________________
__________________________________________________________

2011__________________________________________________________________________
__________________________________________________________

29
30