The liquidity ratio: can a bank pay what it owes?
Why profitable banks can still run out of cash — what the liquidity ratio measures, the NBE floor, and how to read the trend.
A bank can be profitable and well-capitalised and still fail — if it runs out of cash. The liquidity ratio measures whether a bank holds enough liquid assets (cash, central-bank balances, and assets that can be turned into cash quickly) to meet the money it owes on short notice, above all the deposits customers can withdraw at any time.
Why liquidity is different from capital
Capital is about losses; liquidity is about time
Capital determines whether a bank can survive losses over the long run — see the Capital Adequacy Ratio. Liquidity determines whether it can survive the next thirty days. A healthy bank needs both, and strength in one does not compensate for weakness in the other.
Bank runs are liquidity events
Even rumours can trigger withdrawals, which is why supervisors watch liquidity as closely as solvency — and why deposit insurance exists. In Ethiopia, the Ethiopian Deposit Insurance Fund now guarantees deposits up to a set limit, which blunts the panic dynamic.
Liquidity has a cost
Cash and central-bank balances earn little. A bank that hoards liquidity sacrifices income — which is why the ratio needs context, not just a "higher is better" reading.
How to read it
- The National Bank of Ethiopia sets a minimum liquidity ratio that every commercial bank must maintain, so the first question is always: is the bank comfortably above the floor?
- Very high liquidity can mean the bank is struggling to find good loans to make — safe, but potentially wasteful.
- Falling liquidity alongside fast loan growth is the combination to watch: the bank is converting its liquid buffer into illiquid loans. Pair the ratio with the loan-to-deposit pattern described in the balance sheet explainer.
Where you see it here
In Detailed mode on every bank's profile, the liquidity ratio appears alongside CAR, ROE, ROA and the NPL ratio as a gauge, with the five-year trend drawn from the bank's own audited statements. In Simple mode you don't need to read the ratio at all — the rule-based health indicator already weighs the underlying numbers using the published thresholds on the methodology page.
Every liquidity figure is computed from the bank's published disclosures, with the source document linked next to the number.