The Impact of Inflation on Return on Asset of Private Banks: Evidence from of Ethiopian
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Date
2021-07
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A.A.U
Abstract
The study's objective is to analyze the impact of inflations on the Asset of Ethiopian private banks from 2016 to 2020. An inferential statistics method of data analysis has been made on Private Banks to achieve the objective. The study uses both Inflation Rate (IFR) and Lending Average Interest Rate (LAIR) to measure a bank's asset. The research methodology presents the methods, techniques, scientific paths, and procedures in the 16 sampled Ethiopian private banks. The findings shows the existence of an inverse relationship between inflation and the performance of private commercial banks. This negative association was statistically significant; thus, the findings suggested that inflation was an essential factor determining the Return on Assets of private banks of Ethiopia as the p-value is 0.033. The Mean of Inflation Rate and Lending Interest Rate results are all most similar to each other that are 13.4291 and 13.664; the trend in the increase of Inflation rate was higher at the end of the last three years the study shows that is from 14.7% in the Year 2017 to 21.6% to the Year of 2020, it has increased by five percent each year. The average Lending Interest has shown a steady growth in those Years. The researcher can conclude that the revenue generated from the Lending Activities of Banks consumed by the economy's inflation rate. An Inflation adjusted financial statement would have informed that most of the Private Banks, especially for which more than 50% of their incomes were from Interest Income, registered a loss or lesser bank assets. As a recommendation, Inflation adjusted Lending Interest Rate should be applied by the Banks to alleviate impact of Inflation Rate in the Economy.
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Keywords
Inflation, asset, Return on Asset, Bank Performance, Effective Interest Rate