The Effect of Bank Regulation on Financial Performance of Private Commercial Banks in Ethiopia

Abstract

The Effect of Bank Regulation is one of the major concerns for banks and thus achieving the optimum level of liquidity is crucial. The main objective of this study is to investigate The Effect of Bank Regulation on Financial Performance of Private Commercial Banks in Ethiopia. In order to achieve the research objectives, data was collected from a sample of six private commercial banks in Ethiopia over the period from 1999 to 2019. Bank specific variables were analyzed by using the balanced panel regression model. Bank Regulation is measured in two ratios: leverage and loan ratios. The result of this study confirmed that, among the bank specific variables legal reserve and liquidity reserve had statistically significant impact on the determination liquidity of Ethiopian private commercial banks measured by leverage and capital requirement, deposit reserve ,legal reserve ,non-performance loan ,saving interest rate and liquidity reserve statistically significant impact with loan ratio. Whereas except legal reserve and liquidity reserve all other variable had no statistically significant impact on the determination of Bank Regulation of Ethiopian private commercial banks, The negative relationship between capital requirement and liquidity was opposite to our hypothesis but consistent with the “too big to fail” hypothesis. The coefficient sign for capital requirement revealed negative relationship with liquidity and it was in line with our hypothesis and the finance theory. However, capital requirement and deposit reserve have no statistically significant effect on the liquidly of Ethiopian private commercial banks. For leverage liquidity reserve is significant at 1%, banks and legal reserves at 5% while for loan ratio time, deposit reserve, liquidity reserve and non-performance loan are significant at 1%, legal reserve at 5%, capital requirement at 10%. Liquidity reserve is significant at 1% for both leverage and loan ratio.