Determinants of Lending Interest Rate:An Empirical Study on Private Commercial Banks in Ethiopia
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Date
2019-04
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Addis Ababa University
Abstract
The aim of this study is to investigate the determinants of lending interest rate of private
commercial banks in Ethiopia. The study used balanced panel model in examining the
regression model and collect data from eight private commercial banks covering the period
of ten (10) consecutive years, 2008-2017 with a total of 80 observations. To this end, the
study employed a quantitative research approach by documentary analysis based on their
audited financial statement. The study used panel data techniques specifically fixed effect
model on the regression analysis and used E-view8 software. This study has used ‘lending
interest rate’ as dependent variable, while: deposit rate, bank size, liquidity ratio, operating
cost to total asset ratio, profitability, market concentration, and inflation rates are
explanatory variables. The estimated regression results reveal that the liquidity ratio,
profitability ratio and bank size had significant and negative effect on lending interest rate.
Deposit rate, operating cost to total asset ratio, market concentration has positive and
statistically significant effect on lending interest rate. Inflation rate has positive and
statistically insignificant effect on lending interest rate of Ethiopian private commercial
banks. The study recommends to Private commercial banks should manage their internal
inefficiencies; from the regression result operating cost to total asset ratio and lending
interest rate positive relationship in private commercial banks of Ethiopia. This result is
justified as high operating costs are likely to include costs due to inefficiency leading to
higher lending interest rate. The private commercial banks should give more attention in
reduction of operating cost, to improve its efficiency of banks’ intermediation, by using
advanced technologies. The Study also recommends to policy makers the Competition in the
banking sector should be further enhanced and supported by policies that encourage and
foster competition in the banking sector. Measures to promote the growth and image of small
and medium sized banks, in an effort to increase their ability to penetrate markets and break
dominance by few large banks.
Description
A Thesis submitted to the Department of Accounting and Finance in partial
fulfillment for requirements of degree of Master of Science in Accounting and
Finance
Keywords
Lending, Lending interest rates, Private commercial banks