Saint mary’s university

SAINT MARY’S UNIVERSITY SCHOOL OF GRADUATE STUDIES
THE EFFECT OF NATIONAL BANK REGULATION ON BANKS PROFITABILITY: EVIDENCE FROM THE PRIVATE BANKS IN ETHIOPIA
BY MERON TEKALIGN ADVISOR
AREGA SEYOUM (DR.)

JANUARY, 2017 ADDIS ABABA, ETHIOPIA

THE EFFECT OF NATIONAL BANK REGULATION ON BANKS PROFITABILITY: EVIDENCE FROM THE PRIVATE BANKS IN ETHIOPIA

BY MERON TEKALIGN

A THESIS SUBMITTED TO SAINT MARY’S UNIVERSITY, SCHOOL OF GRADUATE STUDIES IN PARTIAL FULLFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF GENERAL BUSINESS ADMINISTRATION

JANUARY, 2017 ADDIS ABABA, ETHIOPIA

ENDORSEMENT

This thesis has been submitted to Saint Mary’s University, School of Graduate Studies for examination with my approval as a university advisor.
Advisor Signature and Date

Declaration

I, the undersigned, declare that this thesis is my original work and has not been presented for a degree in any other university and that all sources of materials used for the thesis have been dully acknowledged.

Declared by:

Name: Meron Tekalign Signature; Date: January, 2017

Acknowledgements

My deepest and warmest thank goes to the Almighty God and his mother St. Marry, who help me in all aspect of my life and my sincere and deepest gratitude goes to my advisor Arega Seyoum (Dr.) for his unreserved assistance in giving me relevant comments and guidance throughout the study. My acknowledgements also go to my family and my husband Gashaw Desalegn for all the supports they provided. My grateful thanks also go to National Bank of Ethiopia and MoFED for providing the necessary data for the study.

Abstract

The main objective of this study is to examine the effect of NBE regulations on private banks profitability through the significant regulatory variables explaining the NBE directives, using bank- specific and macroeconomic variables as control variables. Balanced fixed effect panel regression was used for the data of six private commercial banks in the sample covered the period from 2001 to 2014 (annual data is considered). Three regulatory factors affecting banks performance in terms of net interest margin were selected and analysed. The results indicated that NBE Bill and Credit cap had negative and statistically significant effect on banks profitability but reserve requirement had insignificant. Among the control variables bank size, efficiency and return on equity has a positive and statistically significant impact on performance of banks under the sample measured inters of NIM. Among the macroeconomic indicator variables both inflation and financial sector development has negative and statically significant effect on profitability of banks while GDP has insignificant effect on profitability.
NBE has to consider the effect of such policy on banks profitability and their overall performance.
On the other hand banks need to increase operating efficiency to trade off such effects and to serve their customers as usual to create long-lasting relationship when such kinds of regulations are imposed.