The Effect of National Bank Regulation on Banks financial Performance: Evidence from commercial Banks of Ethiopia

Abstract

This study examines the effects of national bank regulation on financial performance of commercial banks in Ethiopia by using panel data of banks over the period 2011-2020 (for ten years). Since the data is secondary in nature, the quantitative approach of research was applied. The fixed effect model wasapplied in this research based on the hausman specification test. Under this study, return on Asset (ROA) and net interest margin (NIM) was used as dependent variableand explanatory variable includes minimum startup capital requirement, interest rate, legal reserve requirement, capital adequacy and equity investment. The main findings shows from five explanatory variable; three of them (Interest rate, Legal reserve required and limited Equity investment) are statistically significant with P-value less than 0.05 and two of them (minimum start-up capital requirement and capital adequacy) are statistically insignificant with P value greater than 0.05. The sign of coefficients reveals Interest rate (IR) have positively statistically significant effect on both ROA and NIM. Legal reserve requirement rate (LRR) has negative effect on ROA but it has positively effect on NIM. Equity investment (EIR) has positively statistically significant effect ROA but it has negatively statistically significant effect on (NIM).Based on this finding the major recommendations are forwarded to national bank and to commercial banks; theresearcher recommended to National Bank of Ethiopia to set legal reserve requirement that could be in-line to economic conditions of country and it could enhance commercial banks financial performance. Since legal reserve Required have negative effect on ROA, commercial banks to be alert about the effect of legal reserve requirement on their financial performance and they could be proactive towards adjustments by the National Bank of Ethiopia, Regarding to an interest rate as a major regulatory variable national bank should determine based up on the macro-economic conditions of the country to improve commercial banks financial performance in line with county economic growth because it is directly related with investment decision of firms and borrowers. Finally it is recommendable to raise the rate of Equity investment because it has positive significant effect on commercial banks financial performance (ROA).