The Effect of National Bank Regulations on Private Banks Performance

Abstract

This study is aimed to examine the effect of NBE regulation on the activities of Ethiopian private banks performance by using survey data and panel data of banks over the period 2008-2022 for fifteen years. Mainly non-random sampling technique was used in this study. The results from the survey, from both quantitative and interview reveals that same problems with NBE regulations for private banks in Ethiopia. And also for the regression analysis the study uses one dependent variable named return on asset (ROA) and about seven explanatory variables, including Reserve Requirement (RR), Equity Investment (EI), Bill Purchases (Bill), Bank Size (BS), Interest Rate (IR), Capital Requirement (CR) and Capital Adequacy (CA). The regression findings show that five of the explanatory variables, RR, EI, Bill, BS and IR are statistically significant with a p value less than 0.05. In contrast, two of them, CR and CA, are statistically insignificant with a p value greater than 0.05. The sign of coefficients reveals that EI, IR and BS have a positive statistically significant effect on the bank financial performance while both RR and Bill have a negative effect. The study recommends that the NBE use interest rates as a regulatory variable to improve private banks' financial performance, set a minimum reserve requirement that balances banks' performance and economic conditions, increase equity investment rate, minimize the percentage of total loan required to purchase bills or increase the interest rate paid for bills, and encourage banks to mobilize deposits and increase market share through an aggressive branch opening strategy.