THE EFFECT OF BANK REGULATION ON FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN ETHIOPIA

Abstract

This study sought to examine the relationship that exists between bank regulation and financial performance of commercial banks in Ethiopia. The study was guided by the buffer theory, modern portfolio theory, signaling theory, and liquidity preference theory. The research design adopted by the study was explanatory. The target population of the study was a total of 17 commercial banks and 16 of them were included in the study. The study used secondary data collected from NBE and website of each commercial banks for a period of 10 years (2010-2019). Descriptive statistics and fixed effect panel regression analysis were used to analyze the data. The results of panel data regression analysis showed that capital adequacy requirement and deposit interest have negative and statistically significant effect on banks profitability, while minimum paid-up capital requirement, liquidity requirement, legal reserve requirement, inflation, and GDP have positive and significant effect on profitability. Based on this, it is noted that the major source of income for commercial banks is obtained from deposits. Profit of commercial banks also increases with an upsurge of capital and liquidity. In addition, it is noted that commercial banks have been successful in responding to inflation. The study thus recommended commercial banks to increase their liquidity, enhance their endeavors of deposit mobilization, and to comply with capital requirements. In addition, the banks are recommended to enhance their profitability by charging a sensible interest rate that is carefully adjusted for both inflation and deposit interest rate. In the same way, NBE is recommended to strengthen the capital requirements for commercial banks even more to ensure optimal performance, to maintain public confidence and promote industry growth. The national bank is also recommended to issue regulatory mechanisms that consider the way commercial banks tend to mobilize more deposits.