Determinants of Lending Decision and their Impact on Financial Performance: Empirical Study on Private Commercial Banks In Ethiopia

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Addis Ababa University


he objective of the study is to investigate the determinants of lending decision of private commercial banks in Ethiopia and the impact of those factors that significantly affects the lending decision on the financial performance of the banks. Panel data was collected from audited annual financial report of each bank, publications of National Bank of Ethiopia (NBE) and Ministry of Finance and Economic Development (MoFED) and used to analyse the bank-specific determinants as well as the macroeconomic determinants. The collected panel data was analyzed using descriptive statistics, and multiple linear regression analysis. Random effect panel regression was used for the data of six private commercial banks in Ethiopia for the sample covered the period from 2001 to 2015. Eight variables that affect banks’ lending decision were selected and analyzed with E-view 9 econometrics software. The results of panel data regression analysis showed that Liquidity ratio(LIQ), Capital adequacy ratio (CAR), Inflation rate (INF) and gross domestic product (GDP) had positive and statistically significant effect on banks’ lending .Nonperforming loans (NPLs) Cash reserve requirement (CRR) and lending interest rate (INT) had negative and statistically significant effect on banks’ lending. Volume of deposit (VoD) had positive but insignificant effect on banks’ lending. Among factors that statistically significantly affecting banks’ lending; liquidity (LIQ), Lending interest rate (INT) and GDP had positive and significant impact on financial performance whereas, non-performing loans and Cash reserve requirement had negative impact on financial performance. Capital adequacy ratio had positive and inflation rate had negative but, insignificant impact on financial performance. Therefore, banks’ lending had an impact on the financial performance of private commercial banks in Ethiopia. The study suggests that Ethiopian commercial banks should/need to work more to improve their liquidity and capitalization, to reduce their nonperforming loans and consider macroeconomic environment when extend loans. Moreover, banks should exert additional effort to properly manage their loan portfolio in order to enhance their profitability. Key Words: Banks, Bank Lending, Loans and Advances, Financial Performance



Banks, bank lending; Loans and advances; financial Performance