DETERMINANTS OF BANKS’ LENDING BEHAVIOR IN ETHIOPIA: PRAGMATIC EVIDENCE FROM COMMERCIAL BANKS (2004-2013)

Abstract

This study investigated main determinants of commercial banks’ lending behavior in Ethiopian context by using panel data of eight banks over the period 2004 to 2013. It tested and confirmed the impact of internal and external factors on Ethiopian commercial banks’ lending behavior. Since the data is secondary in nature, the quantitative approach was considered and besides, the fixed effect model was used. The fixed effect model was preferred over the random effect model based on the Hausman Specification test and thus, clustered robusted standard error were used to overcome the hetroscedasticity problem. The study considered bank loans and advances as outcome variable and bank specific factors (liquidity ratio, volume of deposit, credit risk and bank capital) as internal explanatory variables, and monetary policy instruments (cash reserve requirement and lending rate) and macroeconomic factors (GDP and annual foreign exchange rate of birr to USD) as an external explanatory variables. The results of fixed effect regression show that except liquidity ratio and lending rate which are significant at 5% level of significant, all bank specific factors are significant at 1% significant level. Thus, they have an impact on lending behavior of commercial banks in Ethiopia. On the other hand, macroeconomic variables (GDP and annual foreign exchange rate of birr to USD) and cash reserve requirement ratio does not affect the lending behavior of Ethiopian commercial banks. Based on the finding of study it has been suggested that Ethiopian commercial banks better to give an emphasis and employ various strategies so as to attract and seize deposits, establish applicable credit policies and arrangements and also critically consider the creditworthiness, rationing and performing ability of their debtors. Besides, they should focus to develop competent and proficient liquidity, credit risk and foreign exchange exposure management systems so as to diminish their negative impact on their lending performance.