Non-Interest Income Determining Factors: Private Commercial Banks in Ethiopian

Abstract

Unlike foreign banks operating in exposure to foreign competition, private commercial banks in Ethiopia have adapted diversified income sources business approaches since the establishment and commencement of service delivery. This paper is the first paper to identify the main determining factors of diversified areas of income source commonly called Non-Interest Income (NonII), other than traditional interest income in Ethiopian private commercial banks. NonII (dependent variable) is a combination of different sub-components among which this paper lists out nine independent variables (Deposit, Liquidity, Loan, Foreign Currency, Net-Interest Income, Provision for loan loss, Capital, Asset and Inflation). The data/variables are seven years (2007/8 – 2013/14), collected from nine (9) private commercial banks’ financial statements. The banks selected in simple cluster sampling technique. The method of analysis conducted at two stages; the first stage of trend/time series analysis done by calculating the yearly mean and coefficient of variation of the selected banks and have pointed out the interdependency of NonII and Net-Interest Income and the income stabilization role of NonII by offsetting risks of decline in interest income. Though, accompanied by high volatility, smaller banks generate higher NonII than larger banks. On the other hand larger banks are more stable and efficient in asset utilization than smaller banks. The second stage of multiple regression analysis conducted on the ten variables and helps to pinpoint two main determining factors of NonII for Ethiopian private commercial banks. Foreign currency holdings and Asset sizes are great contributors for NonII. The study output compared against priori studies conducted in Africa and European Union, and basic similarity and differences observed. The study is the first of its kind (keeps originality) and the results of the analysis can be informative for the banking industry, when reconsidering its business model in the light of current as well as future financial market developments.The study result as well shades some light for further investigation.