THE IMPACT OF REGULATIONS ON THE PERFORMANCE OF ETHIOPIAN PRIVATE BANKS: THE CASE OF 27% NBE BILL PURCHASE REQUIREMENT

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.