Determinants of Commercial Banks off Balance Sheet Activities: An Empirical Study on Ethiopian Banking Industry
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Date
2013-11
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Addis Ababa University
Abstract
Off balance sheet activities have become an issue of global significance and have
received attention for being a source of fee income that is beyond a bank’s balance sheet
activities and avoiding regulatory costs. Although much literature is available on off-
balance sheet (OBS) activities in banking system, this is the first paper that investigates
the off-balance sheet activities in Ethiopian banking industry. It aims to test the tax
regulatory hypothesis and market discipline hypothesis in determining OBS activities of
Ethiopian commercial banks using panel data set during the period of 2005-2012, with a
sample of eight Ethiopian commercial banks. To answer research questions and test the
hypotheses the study adopted the quantitative research approach. The model considers
the impact of size, profitability, loan, credit risk, efficiency, market concentration, capital
adequacy, reserve requirement, real GDP, interest rate spread and inflation on off
balance sheet activities of banks. The estimation results show that all bank-specific
determinants, with the exception of credit risk and loan, significantly affect commercial
banks off balance sheet activities in Ethiopia. From the regulatory factors reserve
requirement is also a significant determining factor of off balance sheet activities, where
capital adequacy requirement negatively affects OBS activities but not significantly.
Finally, with regard to macroeconomic variables, only inflation exhibits insignificant
relationship with banks’ OBS activities. The implications of these results suggest that
regulations, institutional, and technological deficiency in Ethiopia prevent the banking
system from adopting different financial innovations. The results of the study are of value
to both academics and policy makers.
Keywords: Off-Balance Sheets Activities, Regulatory tax hypothesis, Market discipline
hypothesis and Commercial Banks
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Keywords
Off-Balance, Sheets activities, Regulatory tax hypothesis, Market discipline hypothesis and commercial banks