Determinants of loans and advances of commercial banks in Ethiopia

Abstract

The main objective of this study is to investigate the effect of core bank-specific and industryspecific determinants of commercial banks total loans and advances from the period 2002-2013. The paper examined the impact level of volume of deposits, interest (lending) rate, stipulated cash reserve requirements ratio and liquidity ratio on the Lending behavior of commercial Banks currently operating in Ethiopia by taking eight commercial Banks and using OLS estimation method to measure the effect of internal and external determinants on total loans and advances, Secondary data obtained from the financial statements (Balance sheet and Profit/Loss income statement) of commercial banks and data collected from NBE are analyzed. The findings of the study reveal that volume of deposit, cash reserve requirement and liquidity ratio have a positive and statistically significant relationship with the lending behavior of commercial banks'. However, average lending rate has negative and statistically significant relationship with the lending behavior of commercial banks'. The study suggests that banks should mobilize more deposit in order to develop their lending performance, they should watch their loan pricing decisions and banks should cooperate with regulatory authorities.