Determinants of Lending Interest Rate: Empirical Study on Private Commercial Banks in Ethiopia

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2024-06-01

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A.A.U

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The main objective of commercial banks is profit creation because commercial banks are involved in deposit mobilizing and lending which have direct impact on their lending rate. Hence, this study examines factors affecting lending interest of selected commercial banks in Ethiopian. The data covered the period from 2015-2022 G.C for the sample of selected eightPrivate commercial banks. Quantitative research approach and explanatory Research design were adopted in carrying out this research. Secondary data were collected from the selected eightprivate commercial banks using purposive sampling technique and macro- economic data are collected from NBE and World Bank report while internal factor data were collected from audited financial statements. The study used both descriptive and inferential statistics. Mean and standard deviation were used as descriptive statistics, whereas correlation and panel regressions were used from inferential statistics using stata. This study has used ‘lending interest rate’ as dependent variable, while: deposit rate, bank size, liquidity ratio, operating cost, profitability, non-interest income, exchange rate, and inflation rates are explanatory variables. The estimated regression results reveal that the operating cost, profitability, non-interest income, and inflation rates had significant and negative effect on lending interest rate. Deposit rate, bank size, liquidity ratio, has positive and statistically significant effect on lending interest rate. Exchange rate has negative and statistically insignificant effect on lending interest rate of Ethiopian private commercial banks.The study recommends to Private commercial banks should manage their internal inefficiencies; from the regression result operating cost to total asset ratio and lending interest rate negative relationship in private commercial banks of Ethiopia. This result is justified as high operating costs are likely to include costs due to inefficiency leading to lower lending interest rate. The private commercial banks should give more attention in reduction of operating cost, to improve its efficiency of banks’ intermediation, by using advanced technologies. The Study also recommends to policy makers the Competition in the banking sector should be further enhanced and supported by policies that encourage and foster competition in the banking sector. Measures to promote the growth and image of small and medium sized banks, in an effort to increase their ability to penetrate markets and break dominance by few large banks

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