Determinants Of Lending Interest Ratean Empirical Study On Private Commercial Banks In Ethiopia

The aim of this study is to investigate the determinants of lending interest rate of privaterncommercial banks in Ethiopia. The study used balanced panel model in examining thernregression model and collect data from eight private commercial banks covering the periodrnof ten (10) consecutive years, 2008-2017 with a total of 80 observations. To this end, thernstudy employed a quantitative research approach by documentary analysis based on theirrnaudited financial statement. The study used panel data techniques specifically fixed effectrnmodel on the regression analysis and used E-view8 software. This study has used ‘lendingrninterest rate’ as dependent variable, while: deposit rate, bank size, liquidity ratio, operatingrncost to total asset ratio, profitability, market concentration, and inflation rates arernexplanatory variables. The estimated regression results reveal that the liquidity ratio,rnprofitability ratio and bank size had significant and negative effect on lending interest rate.rnDeposit rate, operating cost to total asset ratio, market concentration has positive andrnstatistically significant effect on lending interest rate. Inflation rate has positive andrnstatistically insignificant effect on lending interest rate of Ethiopian private commercialrnbanks. The study recommends to Private commercial banks should manage their internalrninefficiencies; from the regression result operating cost to total asset ratio and lendingrninterest rate positive relationship in private commercial banks of Ethiopia. This result isrnjustified as high operating costs are likely to include costs due to inefficiency leading tornhigher lending interest rate. The private commercial banks should give more attention inrnreduction of operating cost, to improve its efficiency of banks’ intermediation, by usingrnadvanced technologies. The Study also recommends to policy makers the Competition in thernbanking sector should be further enhanced and supported by policies that encourage andrnfoster competition in the banking sector. Measures to promote the growth and image of smallrnand medium sized banks, in an effort to increase their ability to penetrate markets and breakrndominance by few large banks.

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