Off-Balance Sheet Commitments: Determination of practice and Impact on Performance on Ethiopian Private Commercial Banks
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Date
2020-05
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A.A.U
Abstract
One of the striking developments in today’s banking industry is the increasing tendency of
banks engagement in off-balance sheet commitments (OBC). Using off-balance sheet as a
means to increase income/profit has been increasing from time to time. On the contrary,
there are so many risks resulting from such commitments like credit risk, liquidity risk,
market risks, operational risk, capital adequacy risk, etc. Thus, it is necessary to establish
sound OBC management system in order to manage the various risks emerged from these
items and ensure sustainability of the financial institutions.
To obtain an in-depth understanding the overall OBC risk, the researcher employed both
quantitative and qualitative data. Qualitative data was gathered from employees of eleven
privates banks in the form of questionnaire while the quantitative data were obtained from
the National Bank of Ethiopia for ten years period from 2010-2019. Both descriptive and
analytical research methods were applied to assess the OBC management practice and the
inherent risk of the product by investigating its relationship with risk and return. Mean as
well as standard deviation measures were utilized to analyse the data and to make a broad
argument to answer the particular research questions. Furthermore, the analysis considered
correlation and regression analysis to test the study hypotheses. Statistical Package for
Social Sciences (SPSS) was applied to analyse descriptive statistics, correlation and
regression analyses.
As per the result, OBC is increasing at an increasing trend, and OBC had significant
negative impact on the bank’s liquidity and capital adequacy risk, while it had significant
and positive relationship with revenue but negative insignificant relationship with credit
risk and ROE. The study also revealed OBC management practice of the private banking
industry including the role of NBE was found unsatisfactory and not commensurate with the
inherent risk that the product bears and its level of exposure.
Description
A Thesis Submitted To The Department Of Management In Partial
Fulfilement Of The Requirments In Executve Masters Of Business
Administration
Keywords
Ethiopian private commercial banks, Off-balance sheet management, off-balance sheet Commitments, Risk, return