The Impact of National Bank of Ethiopia’s 27% Bond Purchase Directive on Credit Performance and Profitability of Private Banks

Abstract

The financial policy direction enacted by the National bank of Ethiopia in 2011 under directive number MFA/NBEBILL/001/2011 enforced banks to purchase a bond amount equivalent to 27% of every loan they disburse. However, this policy impact on credit performance and profitability of thereof banks was not yet examined. Hence the present study assessed the impact of NBE Bond purchase requirement on credit performance and profitability of private Banks. Secondary data was collected from six private banks. Ten consecutive years (2006-2015) time period data were taken to examine the impact of the directive. To supplement the result obtained from secondary data, key informants of the private banks were also interviewed. So as to test the hypothesis correlation, T-test and ANOVA were employed. The study found positive correlation between bond and credit performance. However, strong negative correlation was observed between bond and profitability of the study Private Banks. The result from the survey data also clearly revealed significant adverse impact of the bond purchase policy on both credit performance and profitability as tested by different statistical methods. This implies that the current government bond purchase directive has negative consequence on the credit performance and profitability of the private banks in Ethiopia rejecting the research hypothesis which states that National bank of Ethiopia’s Bond purchase directive has no impact on credit performance and profitability of private banks in Ethiopia. This study recommends that the Ethiopian government should further strengthen its bond purchase policy direction and ignite the pace of the current growth and development.

Keywords: The impact, credit, profitability, private bank, ANOVA, Ethiopia