Determinants of Commercial Banks' Lending performance: The Case of Private Commercial Banks in Ethiopia

Abstract

The main aim of this study was to identify and examining the macroeconomic and bank-specific factors that determine private commercial banks' lending performance in Ethiopia. In order to achieve this objective, data was collected from eight private commercial banks in Ethiopia operating over the period from 2007 to 2016. Four bank-specific (bank size, customer deposit, nonperforming loan and advance and liquidity) and three macroeconomic (cash reserve requirement, interest rate and gross domestic product) variables were analyzed by using the random effect regression model. The study revealed that bank size, cash reserve requirement and interest rate had positive and significant impact; while nonperforming loan and advance and interest rate had negative and significant impact on private commercial banks' lending performance in Ethiopia. However, customer deposit and gross domestic product had no statistically significant impact on private commercial banks' lending performance in Ethiopia. The study suggests that the private commercial banks operating in Ethiopia should work towards minimizing their nonperforming loans and advances to improve their lending performance; should give due attention on pricing of their loan and advance and consider the macroeconomic environment while developing their strategies.