Determinants of Private Commercial Banks’ Lending in Ethiopia

Abstract

This study aimed to investigate the determinants of private commercial banks’ lending in Ethiopia. To this end, the researcher has selected seven senior private commercial banks in Ethiopia judgmentally. This study used secondary sources of data, which is panel data in nature, over the period 2006-2020.These data were collected from audited annual financial statements of private commercial banks, the National Bank of Ethiopia, and the Ministry of Finance to examine the bank-specific determinants as well as the macroeconomic determinants of private commercial banks’ lending in Ethiopia. This research is an explanatory research design that identifies the cause and effect relationships between the loan and advances and its determinants. The collected panel data were analyzed with descriptive statistics and multiple linear regression analysis. Fixed effect panel regression model was used for this study. Eight explanatory variables that affect banks’ lending were selected and analyzed with STATA 16 econometrics software package. The results of panel data regression analysis showed that bank size and volume of deposit had a positive effect on private commercial banks’ lending in Ethiopia. Cash reserve requirement, lending interest rate,management efficiency, and inflation had a negative and statistically significant effect on private commercial banks’ lending in Ethiopia. Liquidity ratio and Gross Domestic Product had a negative correlation but statistically insignificant with private commercial banks’ lending in Ethiopia.The study suggests that Ethiopian private commercial banks should have to strive to strengthen their asset size and enhance their strategies in mobilizing deposits from the public. In addition, private commercial banks’ should manage their liquidity and administer their lending activity by considering internal factors, existing economic situation, macro-economic environment, regulatory measures, and their target customers when extending loans.