DETERMINANTS OF LENDING RATE OF PRIVATE COMMERCIAL BANKS IN ETHIOPIA

Abstract

This paper investigates the determinants of lending rate in Ethiopian private commercial banking sector. The study used unbalanced panel data collected from annual reports of eight commercial banks operating in Ethiopia during the period 2002 to 2016. Lending rate is determined by bank, industry and macro-economic related factors. A quantitative research approach and explanatory design were adopted in carrying out this research. Secondary data were collected from selected banks using purposive sampling technique. Model Based mainly on the Seminal Ho and Saunders, 1981 dealership model and extensions theories, the study employed panel data estimation techniques to analyze the influence of bank, industry and macroeconomic factors on lending rate. The analysis conducted using the econometric package Eviews 8. The study results show that bank size, operating cost and deposit rate have a positive and significant impact on bank lending rate. Credit risk, bank concentration and GDP have a negative and significant effect on lending rate. However reserve requirement and inflation is not significant for the determinant of lending rate. The study recommends banks to improve operational efficiency, NBE to instill competition within banks and policy makers to promote favorable economic situation. Further studies were recommended in the areas by considering additional variables and considering newly emerging banks.