The Impact of National Bank of Ethiopia Directives on the Profitability and of Private Bank the Case of National Bank of Ethiopia Bill Purchase Requirement
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Date
2016-01
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Addis Ababa University
Abstract
The financial system plays a pivotal role in economic activities in any country. Thus it is
vital to determine the status and assess the financial health of the financial system and take
corrective policy measures continuously. The main objective of the study is to examine the
impact of National Bank of Ethiopia directive: NBE bill purchase requirement on the
performance and liquidity of private commercial banks. Balanced fixed effect panel
regression was used for the data of eight private commercial banks in the sample covered
the period from 2007 to 2014 with a total of 64 observations. The study finds that purchasing
NBE bill had a negative and significant impact of the profitability of private commercial
banks in Ethiopia. However, the magnitude is not severe to result in loss. Moreover, the pre
and post policy periods comparison revealed that a relatively better profitability record for
private commercial banks during the time of policy restrictions by way of clearing the excess
liquidity holding of banks, diversify other fee generating services and the cost related to bill
purchase to some extent seems covered by the borrowers (stable liability prices and banks
discretion to adjust their asset prices). Similarly the requirement of purchasing NBE bill had
negative and significant impact on the liquidity of private commercial bank in Ethiopia. In
addition the pre and post periods comparison revealed liquidity of private commercial banks
decreased after requirement. This is due to the fact that the requirement of purchasing NBE
bill has a possibility of creating maturity mismatches because Private Banks collect savings
mostly at two to three-year maturity and even shorter in some cases and fulfilling the 27
percent requirement means that they have to freeze these resources for 5 years.
Key words: government intervention, liquidity, NBE bill, profitability; private banks,
regulation, supervision
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Keywords
Government intervention, Liquidity, NBE bill, Profitability, private banks, Regulation, Supervision