Determinants Of Lending Decision And Their Impact On Financial Performance Empirical Study On Private Commercial Banks In Ethiopia

he objective of the study is to investigate the determinants of lending decision of private commercial banks inrnEthiopia and the impact of those factors that significantly affects the lending decision on the financial performancernof the banks. Panel data was collected from audited annual financial report of each bank, publications of NationalrnBank of Ethiopia (NBE) and Ministry of Finance and Economic Development (MoFED) and used to analyse thernbank-specific determinants as well as the macroeconomic determinants. The collected panel data was analyzedrnusing descriptive statistics, and multiple linear regression analysis. Random effect panel regression was used for therndata of six private commercial banks in Ethiopia for the sample covered the period from 2001 to 2015. Eightrnvariables that affect banks’ lending decision were selected and analyzed with E-view 9 econometrics software. Thernresults of panel data regression analysis showed that Liquidity ratio(LIQ), Capital adequacy ratio (CAR), Inflationrnrate (INF) and gross domestic product (GDP) had positive and statistically significant effect on banks’ lendingrn.Nonperforming loans (NPLs) Cash reserve requirement (CRR) and lending interest rate (INT) had negative andrnstatistically significant effect on banks’ lending. Volume of deposit (VoD) had positive but insignificant effect onrnbanks’ lending. Among factors that statistically significantly affecting banks’ lending; liquidity (LIQ), Lendingrninterest rate (INT) and GDP had positive and significant impact on financial performance whereas, non-performingrnloans and Cash reserve requirement had negative impact on financial performance. Capital adequacy ratio hadrnpositive and inflation rate had negative but, insignificant impact on financial performance. Therefore, banks’rnlending had an impact on the financial performance of private commercial banks in Ethiopia. The study suggestsrnthat Ethiopian commercial banks should/need to work more to improve their liquidity and capitalization, to reducerntheir nonperforming loans and consider macroeconomic environment when extend loans. Moreover, banks shouldrnexert additional effort to properly manage their loan portfolio in order to enhance their profitability.rnKey Words: Banks, Bank Lending, Loans and Advances, Financial Performance

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