Monetary Policy and Loan Portfolio of Ethiopian Commercial Banks: An Assessment of the Role of Credit Creation
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Date
2017-06
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Addis Ababa University
Abstract
The study was carried out to empirically explore the monetary policy and macroeconomic
determinants of Ethiopian commercial banks’ performance proxied by total loans and advance
using balanced 14 years (2003-2016) annual audited financial statements of 6 banks and
macroeconomic data. It covers 100% of the population which are operated full years in the study
period. The study used three monetary policy variables: Liquidity Requirement Ratio, Lending
Interest Rate and Cash Reserve Requirement and two macroeconomic: Real gross domestic
product growth rate and annual Inflation Rate. Fixed effect model was used for the total loans
and advance. The empirical result revealed that all monetary policy and macroeconomic
variables except cash reserve requirement ratio are statistically significant in determining
performance of Ethiopian commercial banks. The study suggests the need for private commercial
banks to consider the macro economic factors when developing their strategies to efficiently
manage their loans and advances, as we found significant relationship between macro-economic
factors and total loans and advances. The study also recommends the National Bank of Ethiopia
moderate the minimum policy rate as instrument for regulating commercial banks operations and
facilitating investment in the economy and the authority better re-evaluate the policies governing
cash reserve requirement ratio in order to influence bank reserves considering its current
insignificant effect on commercial banks credit creation role.
Description
A Research Project Submitted in Partial Fulfillment of the
Requirements for the Award of Masters of Business
Administration in Finance
Keywords
Commercial banks loans and advances, Monetary instruments, Monetary policy