Determinant of Income Diversification: Evidence from Commercial Banks in Ethiopia
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Date
2019-02
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Addis Ababa University
Abstract
This thesis presents an analysis of the determinants Ethiopian commercial banks non-interest
income diversification decisions. The objective of this study was to investigate the effect of both
bank specific and macro-economic factors on non-interest income diversification. This aimed to
identify the most relevant bank specific and macro-economic factors that affect commercial
banks income diversification in Ethiopia. For this purpose, a panel dataset comprising eleven
Ethiopian commercial banks from 2002/03 to 2016/17 were selected and analyzed. The study
used fixed effect regression technique, correlation analysis and descriptive statistics to analyze
the data using STATA statistical software. The dependent variable used to measure non-interest
income diversification was Non-interest income ratio. The researcher used bank size, net-interest
margin, lending leverage, insolvency risk, capital adequacy and efficiency as bank specific
independent variables. The researcher also used real GDP growth rate and inflation rate as
macro-economic independent variables. From the result of this thesis, the researcher finds that
banks income diversification decision reflects a variety of managerial abilities to manage:
insolvency risk, net-interest margin, capital adequacy, lending leverage and efficiency. The
empirical result of this study shows that insolvency risk has a positive and significant effect on
non-interest income diversification of commercial banks in Ethiopia from 2002/03 to 2016/17.
Meanwhile, capital adequacy, lending leverage, net-interest margin and efficiency have a
significant negative impact on non-interest income diversification decision. Moreover, bank size,
inflation rate and real GDP growth rate have insignificant positive effect on non-interest income
diversification of commercial banks in Ethiopia. Furthermore, net-interest margin, insolvency
risk, capital adequacy, lending leverage and efficiency were the major factors that affect income
diversification decision of commercial banks in Ethiopia and management and regulators of
Ethiopian commercial banks need to consider these factors while setting rules and procedures
on income diversification decision.
Description
A Thesis Submitted to the School of Graduate studies of Addis Ababa University in
Partial Fulfillment of the Requirements for the Degree of Master of Science in
Accounting and Finance.
Keywords
Commercial banks, Ethiopia, Income diversification, Non-interest income