THE NATIONAL BANK OF ETHIOPIA BILL PURCHASE POLICY ON COMMERCIAL BANKS IN ETHIOPIA

Abstract

Commercial banks in Ethiopia have a prominent role in the financial sector. Time and time again, as any business organization these banks, face problems that puts pressure on their performance. The National Bank of Ethiopia as the Central Bank of the country monitors and controls commercial banks in the view of protecting depositors (public) interest. In line with this objective National Bank issues different proclamation and directives as part of the government monetary policy. Back in March 2011, it issued a directive which forced commercial banks to allot 27% of the total fund held for loan and advances to purchase government bonds with five years maturity time. Banks were calming that the Bill is taking a huge amount of fund that could otherwise have been forwarded as a loan. The study tried to investigate if what the banks are calming is true. In line with the stated problem, the study investigated the impact of the NBE Bill purchase on liquidity, profitability & lending capacity. Lending capacity and liquidity of commercial banks is compromised as a result of the directive and profitability has also been affected but, since banks don’t solely relay on income generated from loan and advances the magnitude of its impact is relatively higher on lending capacity and liquidity. As for the results from the model the NBE Bill purchase negatively affects liquidity and lending capacity of commercial banks and the impact on profitability is insignificant. Though, 2012/13 is not included in the study report from the media showed that old private banks registered a fall in their profit for the first time in their history and the NBE Bill is among the major factors that contributed for the fall. Empirical results in the study emphasize that more caution is needed on commercial banks’ lending capacity and liquidity positions. Thus, involvement of NBE to help neutralize the impact created on liquidity and lending capacity is necessary.