Determinants of Lending Interest Rate:An Empirical Study on Private Commercial Banks in Ethiopia

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Addis Ababa University


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.


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


Lending, Lending interest rates, Private commercial banks