FACTOR AFFECTING PRIVATE COMMERCIAL BANKS LOAN AND ADVANCE IN ETHIOPIA

Abstract

The objective of the study is to investigate the factor affecting loan and advance of private commercial banks in Ethiopia. Panel data was collected from audited annual financial report of sampled banks, publications of National Bank of Ethiopia (NBE) and for the macro-economic factors from Ministry of Finance and Economic Cooperation (MoFEC) and used to analyses the bank-specific Factors as well as the macroeconomic Factors. Quantitative research approach and explanatory design were adopted in carrying out this research. Secondary data were collected from NBE for the selected six private commercial banks out of eighteen banks using convenient sampling technique from 2000-2015. The study employed panel data to analyze the factor affecting loan and advance on the credit decision of private commercial banks. Data were analyzed using descriptive statistics, correlation and regression analysis for total loan and advance. Before performing OLS regression the researcher uses model specification test to select the appropriate model for regression analysis. The study used the fixed effect model since the sample for this study was not selected randomly. Furthermore, the models were tested for the classical linear regression model assumptions and the results showed that all the tests are satisfactory in regressions. The results of panel data regression analysis showed that NBE Bill Purchase (BILL),Gross domestic Product (GDP), Inflation (INF), Market Share in terms of total asset (MS) has a positive and significant influence in determining credit facilities granted by the private commercial banks in Ethiopia. The findings also showed a significant and negative relationship between Deposit Growth (DG), loan to Total Assets (NPL), Liquidity (LIQ), Capital Adequacy (CAR), Lending Interest rate (LIR) has negative and insignificant influence, but Profitability (ROA) has positive and insignificant influence in determining credit facilities granted by the private commercial banks in Ethiopia. Ethiopian commercial banks better give an emphasis and employ various strategies so as to attract and seize deposits and shall focus on term deposit that have special consideration to keep the deposit for specified time to decrease high liquidity to have increased the credit facility.