Saint mary’s university

Discussion of the regression results

Regulatory variables

The research attempted to estimate the impact of regulatory variables controlling for bank specific and macroeconomic variables. As shown in the table 4.5 above, the model estimates four regulatory variables that are used in this study namely investment in NBEBills, reserve requirement and creditcap and Liquidity ratio and one policy variable called housing scheme dummy. The result of regression output is discussed one by one as follows.

• Investment in NBE Bills and Profitability

According to Table 4.5 investment in NBE-Bills is negatively related with profitability (NIM) with a coefficient estimate of -0.555853. Holding other factors constant, a100% increase in investment in NBE Bill reduces NIM by 55.6% and the p value of NBB (i.e.0.0093) reveals that it is statistically significant at 1% level of significance and also it was in line with the hypothesis stated in chapter one. This is because the net income that agiven bank gain decreaseas almost one third of the total loan that a bank gives to borrowers is invested in government bill.

As investment in NBE Bills increase, banks will lose a benefit if it would have invested in relatively high interest bearing assets, like giving loans to borrowers with an interest rate of at least 12% but NBE Bills generate only 3% return which results in an opportunity cost of 9%.

• Credit Cap and Profitability

The result from the estimation of the model shows that there exist a negative and
statistically significant relationship between credit cap and net interest margin with the coefficient estimates of-0.27081 and the p value was 0.0082 which was highly significant at 1% level significance. Holding other factors constant, during the credit cap period the profitability of banks has decreased by 27%.
The reason for the indirect relationship between profitability of banks and credit cap is, during regulation taken by the National Bank of Ethiopia not to give loan above credit ceiling this has hampered interest income inflow from loans. However, the banks will pay an interest expense of the same amount before the credit cap policy for the depositors regardless of their interest income. This result was consistent with our expectation.

•