The Effect of Reserve Requirement on Ethiopian Commercial Banks’ Performance: Profitability and Lending Capacity

Abstract

The study has taken one of the top regulatory issues; the reserve requirement, and studied its effect on bank performance. The general objective of the study was to study the relationship between reserve requirement and the performance of commercial banks in Ethiopia, whereas the specific objectives of the study were to study the effect of reserve requirement on commercial banks’ profitability and lending capacity. The study used time series data of thirteen commercial banks from year 2004 to 2016 which were established before 2010 G.C. Moreover, the study used quantitative research approach. The study only took into account bank specific variables to be explanatory variables. Secondary financial data were analyzed using linear regressions models. The empirical results from regression analysis showed that reserve requirement has a negative effect on both commercial banks’ profitability and lending capacity, thereby, affecting performance. Based on the conclusions the study recommends the National Bank of Ethiopia to take thorough investigation regarding the far-reaching effect of reserve requirement. Moreover, this study recommends commercial banks to be aware about the effect of reserve requirement on their performance and be proactive towards amendments by the National Bank of Ethiopia.