Determinants of Cost of Financial Intermediation: Empirical Study on Commercial Banks in Ethiopia
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Date
2015-06
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Addis Ababa University
Abstract
This paper investigates the determinants of cost of financial intermediation (CFI) of
Ethiopian commercial banking sector during the period from 2000 to 2013. The study was
based on the hypothesis that cost of financial intermediation in Ethiopian banks‟ is
determined by bank, industry and macro-economic related factors. Several theories and
empirical outcomes were propounded to explain the determinants of cost of financial
intermediation proxied by net interest margin. The variables were chosen based on findings
from both empirical and theoretical literature. A quantitative research approach and
explanatory design were adopted in carrying out this research. Secondary data were collected
from selected eight commercial banks out of nineteen banks using purposive sampling
technique. Based mainly on the Seminal Ho and Saunders, 1981 dealership model and
extensions thereto, the study employed panel data estimation techniques to analyze the
influence of bank, industry and macroeconomic factors on CFI. The fixed effect regression
technique was used to estimate the model using the econometric package EViews 8. The
results obtained indicated that bank intermediation margin are high in Ethiopia and it is
generally driven by banks, industry and macro-economic factors. And specifically the
estimation results show that operating costs, capital of banks, market concentration, market
share, economic growth and inflation have a positive and significant effect on CFI. Credit
risk, asset size, liquidity risk, and opportunity cost of reserve have a negative and significant
effect on CFI. Profitability is not significant in determining CFI. The study recommends
banks to improve operational efficiency, NBE to instill competition with in banks and policy
makers to promote favourable economic situation. Further studies were recommended in the
areas by considering additional variables and considering newly emerging banks
Keywords: Ethiopian Banking Sector, Net Interest Margin (NIM), Cost of Financial
Intermediation (CFI)
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Keywords
Ethiopian banking Sector; net Interest margin (NIM); cost of financial intermediation (CFI).