Determinants Of Cost Of Financial Intermediation Empirical Study On Commercial Banks In Ethiopia

This paper investigates the determinants of cost of financial intermediation (CFI) ofrnEthiopian commercial banking sector during the period from 2000 to 2013. The study wasrnbased on the hypothesis that cost of financial intermediation in Ethiopian banks‟ isrndetermined by bank, industry and macro-economic related factors. Several theories andrnempirical outcomes were propounded to explain the determinants of cost of financialrnintermediation proxied by net interest margin. The variables were chosen based on findingsrnfrom both empirical and theoretical literature. A quantitative research approach andrnexplanatory design were adopted in carrying out this research. Secondary data were collectedrnfrom selected eight commercial banks out of nineteen banks using purposive samplingrntechnique. Based mainly on the Seminal Ho and Saunders, 1981 dealership model andrnextensions thereto, the study employed panel data estimation techniques to analyze therninfluence of bank, industry and macroeconomic factors on CFI. The fixed effect regressionrntechnique was used to estimate the model using the econometric package EViews 8. Thernresults obtained indicated that bank intermediation margin are high in Ethiopia and it isrngenerally driven by banks, industry and macro-economic factors. And specifically thernestimation results show that operating costs, capital of banks, market concentration, marketrnshare, economic growth and inflation have a positive and significant effect on CFI. Creditrnrisk, asset size, liquidity risk, and opportunity cost of reserve have a negative and significantrneffect on CFI. Profitability is not significant in determining CFI. The study recommendsrnbanks to improve operational efficiency, NBE to instill competition with in banks and policyrnmakers to promote favourable economic situation. Further studies were recommended in thernareas by considering additional variables and considering newly emerging banksrnKeywords: Ethiopian Banking Sector, Net Interest Margin (NIM), Cost of FinancialrnIntermediation (CFI)

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