The impact of macro and institutional factors on bank liquidity: a case of the East African Community (EAC): a panel data analysis

Abstract

This study aims at exploring the impact of Macro and Institutional factors on Bank Liquidity within the East African Community. Banks are required to have a liquidity ratio of not less than 20% threshold to be able to meet the obligations of their clients and depositors who may want to withdraw their savings. However, banks are below the above required liquidity ratio. Therefore, the study employs a Robust Fixed Effects Model on data for the East African countries Uganda, Kenya, Tanzania, Rwanda and Burundi for the period of 2002 to 2020 to explore the impact of Macro and Institutional factors on Bank Liquidity within the East African Community. Data was obtained from the World Bank Databases for World Development indicators, World Governance indicators and World Bank global financial development databases. The findings of the study indicate unemployment rate and corruption have a negative effect on bank liquidity, while Government Effectiveness and political stability have a positive impact on Bank Liquidity. The study suggests that in order to ensure that banks hold adequate Liquidity; the government should create a more favorable political climate, reduce on the unemployment rate through the establishment of anti-unemployment venture, as well as control corruption.