“Determinants Of Lending Performance In The Case Of Selected Private Commercial Banks In Ethiopia”

Abstract

Lending is a main function of banks, as a result loan and advance consist the largest part of asset and the largest income generating asset of banks. The main objective of the study was to examine determinants of lending performance of private commercial banks in Ethiopia. The study addressed the knowledge gap by focusing on selected private commercial banks. Explanatory type of research design was employed because of the nature of research problem and issues to be addressed. The study applied mixed approach to understand and triangulate the relationship of explanatory variables with bank lending. Among twenty nine private commercial banks in Ethiopia banks fifteen private banks were selected for the study using purposive sampling technique. This study utilized both secondary and primary data; secondary data was ten years audited financial statement of selected private commercial banks collected from National Bank of Ethiopia and primary data was collected through structured interview from all credit analysts at head office of selected banks. While dependent variable was total loan and advance, independent variables included in this study were categorized as bank specific factors (volume of deposit, investment portfolio, management soundness and bank size), industry specific factors (capital adequacy ratio and reserve requirement) and macro economy factors (lending interest rate, and inflation rate). Random effect regression model was used to investigate how those predictor variables affect bank lending. The result of random effect regression model revealed that volume of deposit has positive and significant effect on bank lending. On the other hand, capital adequacy ratio, bank size, lending interest rate and management soundness have positive and insignificant impact on banks’ lending. The remaining variables such as reserve requirement, investment portfolio and inflation rate have negative and insignificant impact on banks’ lending. On other hand the interview results also underscore that private banks’ lending performance is shaped by a combination of internal strategies, regulatory frameworks, and broader economic conditions. Efficient management, deposit mobilization, and adaptability to market dynamics are critical for improving lending outcomes in Ethiopia's banking sectors. The study recommends that Ethiopian private commercial banks could enhance their strategies to attract and retain more deposits from the public through creating awareness, focusing on unbanked society, improving their service excellences and using new banking technology to obtain more funds which can facilitate their lending activities. Furthermore to maintain the soundness and stability of the financial sector, the closer consultation and cooperation between banks and the regulatory authorities at the stage of policy formulation to take into account the effect of the regulatory measure( inflation and reserve requirement ratio) on banks’ lending,