Determinants of Commercial Banks Lending: Evidence from Ethiopian Commercial Banks

Abstract

The study was mainly aimed to confirm the main determinants of commercial bank lending in Ethiopia by using panel data of eight commercial banks in the period from 2005 to 2011. It tested the relationship between commercial bank lending and its some determinants (bank size, credit risk, gross domestic product, investment, deposit, interest rate, liquidity ratio and cash required reserve). Seven years financial data of eight purposively chosen commercial banks were used for analysis purpose. Ordinary least square (OLS) was applied to determine the impact of those predictor variables on commercial bank lending. The result suggests that, there is significant relationship between commercial bank lending and its size, credit risk, gross domestic product and liquidity ratio. But deposit, investment, cash required reserve and interest rate does not affect Ethiopian commercial bank lending for the study period. The study suggests that commercial bank have to give more emphasis to credit risk and liquidity ratio because it weakens banks loan disbursement and leads a bank to be insolvent.

Keywords:  Commercial Banking,  credit risk,  deposit.  interest rate, lending,