An Econometric Analysis of the Nexus Between Banks’ Sub-Sectoral Credit Allocation and Operating Profit: Evidence from Private Commercial Banks in Ethiopia

Abstract

The purpose of this study was to investigate the link between private commercial banks’ sub- sectoral loan and advance distribution and operating profit over the period 2010-2016 using unbalanced short panel. The paper was designed following post-positivist paradigm, correlational research design with the dimension of ex post control over variables; longitudinal time dimension; quantitative approach in depth; and deductive method of inquiry. Target population was all 16 private commercial banks in Ethiopia. From these, banks having seven years annual financial report from 2010 to 2016 were selected purposely. Comparison among Pooled OLS, fixed effect and random effect models was carried out to choose the best fitted model. Accordingly, a random effect was chosen. The regression results of random effects GLS revealed that credit distribution to domestic trade and service, manufacturing sector, and import and export has statistically positive effect on operating profit. On the other hand, credit to building and construction and transportation has statistically insignificant positive relationship with interest income. However, private banks’ credit to agricultural sector has statistically insignificant negative association with operating profit.

Keywords: Credit Allocation, Operating Profit, Private Banks, Random Effect.