Determinant Of Lending Interest Rate On Commercial Banks In Ethiopia

Abstract

The main aim of this study was to investigate the determinant of lending interest rate in Ethiopian commercial banking industry. To achieve the objective of the study quantitative research approach was adapted with six years data from 2016 to 2021. The data was collected from sixteen private commercial banks and national bank of Ethiopia. The random effect model was employed to identify bank specific and macro economic variables affecting lending interest rate measures using proxy variables; Interest income on loans/Average Loans and advance. The funding of the random effect model revealed that liquidity, operation expense, noninterest income, and bank size have positive significant impact on lending interest rate, whereas profitability and inflation have negative and statistically significant impact of lending interest rate of Ethiopian private commercial banking industry. Therefore, based on the result of this study it’s suggested that Ethiopian private commercial banks should have less liquid asset should implement effective and efficient liquidity management system such as making more short term investments, Ethiopian private commercial banks should make a diversified investment portfolio in order to maximize the revenue earned from non core business activities and The government must make efforts to maintain low inflation, government borrowing, encourage savings and investment policies