The effects of Bank regulation on financial performance of Commercial Banks in Ethiopia

Abstract

Regulation of the financial sector is major aspect of consideration by the regulating authority, since financial sector highly influences the performance of the entire economy. The goal of this research was to study if there was a link between bank regulation and financial performance. Return on asset was the dependent variable, whereas regulatory and control variables were the independent variable.Return on asset ratio was used to assess financial performance. Legal reserve requirement, liquidity requirement, capital adequacy requirement, deposit interest rate regulation, asset management, market share, loans and advances, bank size were employed as independent variables in the study. The researcher employed random effect model to look at bank regulations that affect commercial banks' financial performance.Secondary data was used for the study.Furthermore, all operating commercial banks in Ethiopia were chosen as the study population, and a purposive sampling method was employed to choose a sample of twelve commercial banks from this population with a total of 132 observations between 2010 and 2020. From the regulatory variables the regression results revealed that capital adequacy requirement and legal reserve requirement had a positive and significant impact on commercial banks financial performance, while deposit interest rate regulation had negative and significant impact on commercial banks financial performance and liquidity requirement had positive and insignificant. From control variables market share , loans and advances had positive and significant impact on commercial banks financial performance, while bank size had negative and significant impact and asset management had negative and insignificant impact on commercial banks financial performance. Regulatory organs could continue to follow the regulations that have been imposed and even add other regulators that enhance the financial performance of the commercial banks.