International Journal of Financial Management

Tesfaye Boru Lelissa ¹, Abdurezak Mohammed Kuhil ²

Affiliations
1 Debub Global Bank S.C., Addis Ababa, ET
2 Department of Business Leadership, School of Commerce, College of Business and Economics, Addis Ababa University, ET

Abstract

The study has explored the impact of selected regulatory variables on performances applying a panel regression on 18 commercial banks in Ethiopia for the period 1999-2015. The variables used in the model are directly derived from the extant regulatory approach used by the Central Bank to regulate the banking business. The literature review also shows that most of them are enacted in other countries with few exceptions and mainly related to bill purchase requirements. The model constructed, therefore, has established and finds a statistically significant relationship in some of the regulatory variables with performance measures. The most important findings of this study relate to the negative affect of some of the recent policy directions from the regulator on performances. For instance, branch growth and bill purchases have a statistically significant negative relationship with bank performances. This should be one of the areas requiring policy flexing from the regulatory side in the future. Nevertheless, other policy direction such as capital growth requirement remains a positive contributor to performances. More specifically, the study finds that exchange rate has a positive and statistically significant relationship with the profit models. Despite the benefit of a depreciating local currency and a stable foreign currency type to shield them from currency fluctuation, it allowed banks to earn a ‘policy profit’. The depreciation of Birr permitted banks to enjoy a profit from their foreign currency holdings in the form of daily asset revaluations. Nevertheless, many of the variables (prudential regulatory variables) used in this study (interest rate, reserve rate, number of new entrant banks, and level of entry capital) are not statistically significant to influence on bank performances.

Keywords

Bank, Ethiopia, Performance, Regulation.

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Tesfaye Boru Lelissa ¹, Abdurezak Mohammed Kuhil ²

Affiliations
1 UNISA, Vice President, Debub Global Bank S.C, ET
2 School of Commerce, College of Business and Economics, Addis Ababa University, ET

Abstract

A detailed review of existing literature on the structure-conduct-performance (SCP) relationship indicates that the empirical divergence between SCP and competing hypothesis is still not conclusive which is attracting many research works across the world, and recently in Africa. Studies on SCP are dominated by quantitative analysis with exclusion of non-quantifiable variables such as related to conduct and/or those lack data (regulation). The majority of studies employ a multiple linear regression model where a measure of bank performance (mostly profit) is regressed on market concentration variables (such as k-firm, Herfindahl-Hirschman Index, etc.) along with some control variables. Studies that used the structure model have limited focus on other key variables like regulation, macroeconomic, and industry factors. They have also applied a quantitative approach and assumed conduct as being a derivative of the market structure. Hence, there was no attempt to explore the behavior of banks within the given structure, banking, and macro environment. Few studies have explicitly considered Ethiopia’s banking performance using the structural approach (SCP or ESH). Nevertheless, the existing bank performance studies were not analyzed incorporating big banks in the industry, with long period observation of banks, using parametric and non-parametric methods, which are scarce in the Ethiopian context.

Keywords

Structure, Conduct, Performance, Bank, Ethiopia.

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