Determinants of Net Interest Margin in the Ethiopian Banking Industry
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Date
2016-03
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Addis Ababa University
Abstract
Determinants of Net Interest Margin (NIM) of commercial banks vary from
economy to economy due to country, region and firm specific factors, and
variation in social and economic conditions. This research assesses and
identifies the determinants of net interest margin in the banking industry
of Ethiopia. It mainly used unbalanced panel data collected from annual
reports of sixteen commercial banks operating in Ethiopia during the
period 1997 to 2014. Specific macroeconomic data such as RGDP and
Inflation were collected from annual reports of the MoFED and used to
examine their impacts. In addition, expert opinions were obtained from
bank experts working in both private and public commercial banks to
examine the effects of changes in the internal and external factors on the
performance of banks. Analysis was made based on two unbalanced panal
data regression models focusing on the banking industry in general and
private commercial banks independently. The findings of the study
indicate that cost efficiency, implicit interest payment, competition and
scale efficiency consistently have positive and significant effects on net
interest margin. On the other hand, management efficiency has negative
and significant effect on NIM in both cases. However, macroeconomic
variables like inflation and gross domestic product do not seem to have
significant effect on the determination of NIM. Thus, it is possible to
conclude that internal factors are indispensable determinants of bank
performance in Ethiopia. As a result, all commercial banks are expected to
consider operational efficiency and business growth to maximize their
return. Therefore, executives of banks, bank policy advisors and the
monetary authority need to focus on these two pillars performance to
ensure optimal NIM.
Keywords: Net interest margin, banking industry, macroeconomic
variables, private banks, banking performance
Description
Keywords
Net interest margin, Banking industry, Macroeconomic variables, private banks, Banking performance.