The Effect of Inflation on the Performance of Private Commercial Banks in Ethiopia: the Case of 12 Selected Banks
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Date
2025-02-17
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A.A.U
Abstract
Inflation one of the prevalent issue in Ethiopia, have been growing nearly 25% on average for the last 5 years, a relatively higher rate & affects various sectors of the economy including the banking sector. CB, whose primary product is financial service, is highly affected by this inflation dynamics. A higher inflation rate leads to an economic disruption & this affect both the real & financial sectors. Slowdown in the economy, downsize the amount of money that flow to CBs in the form of deposit & vice versa.
This study examined ‘The effect of inflation on the performance of private CBs in Ethiopia: a case of 12 selected banks; particularly highlighting its influence on Return on Equity (ROE) & Efficiency Ratio (ER); using reliable data for the period covering 2009 to 2024; analyzed using a quantitative approach, mainly panel data analysis techniques: the fixed effect model and its respective error correction version i.e. the Driscoll and Kraay fixed effect model with robust standard errors. The results are inflation positively & significantly affects return on equity (ROE) & negatively & significantly affects efficiency ratio (ER) of examined PCBs. The findings of this thesis suggest that inflation affects CBs performance by boosting return on equity (ROE) through higher lending rates while reducing efficiency due to rising operational costs. Ethiopian CBs, like those in other emerging economies, must implement dynamic interest rate strategies, cost-saving measures, digital transformation & revenue diversification to navigate inflationary conditions successfully. NBE should also play crucial role in inflation stabilization & ensuring a sustainable banking environment.