THE EFFECT OF INVESTMENT ON PERFORMANCE OF COMMERCIAL BANKS IN ETHIOPIA

Abstract

The effect of investment has been considered to be an important issue on the performance of commercial banks. This study empirically examines the effect of investment on banks performance in Ethiopia and interprets the result by relating with the regulations. The study used balanced panel model in examining the regression model and collect data from eight commercial banks covering the period of eleven consecutive years, 2005-2015. The study used panel data techniques specifically Fixed Effect model on the regression analysis and used EView8 software. Before the regression analysis the researcher test the assumption of CLRM that are, error of zero mean, normality, heteroscedastcity, autocorrelation and multicollinearity were conducted on the data. The study used one dependent variable ROE, four independent variables that are fixed asset investment, foreign deposit, equity investment and NBE Bill purchase and one control variable capital adequacy. The regression result show that fixed asset investment and foreign deposit had a positive and significant effect on performance of banks. On the other side NBE Bill purchase had a negative and significant effect on the performance of commerce banks. The control variable also had a negative and significant effect on the performance of commercial banks. One of the independent variable equity investments had negative and insignificant effect on banks performance. The research provides evidence for all variables that investment has an effect on the performance of Ethiopian commercial banks. The research concluded that investment plays a significant roll on the performance of Ethiopian commercial banks. The study recommended Ethiopian commercial banks should give attention on their investment policy and NBE policy maker to review the directives considering different factors.