| Abstract: | The study has taken one of the top regulatory issues; the requirement to purchase 27% bill,
and analyzed its impact on bank performance. The general objective of the study was to
assess the relationship between regulations and the performance of private banks in Ethiopia.
Whereas the specific objectives of the study are to assess the impact of the captioned
regulatory measure on the profitability and liquidity of private commercial banks. Panel data
from 2007-2014 of eight private banks which were operational on and before 2006 were used
in analyzing the impact. These Eight private banks were selected using cluster sampling
technique and the cluster is selected using purposive sampling considering the experience of
banks in the industry. To draw feasible conclusion and recommendation, primary data were
also collected from 16 top executives of private banks using unstructured interview. Multiple
linear regression method, correlation, mean and standard deviation was used to analyze
secondary data and the primary data was presented in narration. Accordingly, the finding
indicated that exposure to government bills has weak negative association with performance.
Nevertheless, the magnitude is not severe. Moreover, the pre and post policy periods
comparison revealed a relatively better profitability record for private banks during times of
policy restrictions. Therefore, the bill seems contributed positively to performance via moping
the excess liquidity holding of banks or to invest excess funds in earning government
securities than the customary practice of holding liquid asset in zero earning accounts at the
NBE. In general, the result of the study shows that the effect of the policy measure is mitigated
by the excess liquidity standing of banks during the policy formulation, the likely possibility to
expand to other fee generating services, stable liability prices and banks discretion to adjust
their asset prices. Nevertheless, the decline trend in the share of loans from the total asset
could have negative effect on the long run which in fact to some extent will be moderated by
the maturity of part (but significant sum) of the bills in few years’ time. Considering the
output of the research, widening of income basis, introduction of new products to reach
unbanked society and branch expansion so as to mobilize deposit, revision of government
policy imposed on private banks and further exploration on the long run impact of the
requirement is recommended. |
