Saint mary’s university

Reserve Requirement and profitability

Theoretically we expect a negative relationship between required reserve and banks profitability. Because required reserve is a non interest bearing deposit of some of the proportion of deposit of customers at the National Bank of Ethiopia. The banks would have earned an interest rate income if they were allowed to lend or invest the equivalent amount of money on interest bearing investment. The result form the regression shows there is no statistically significant relationship between required reserves and profitability of banks in Ethiopia.

• Liquidity ration and profitability

Liquidity refers to the ability of the bank to fulfil its obligations, mainly of depositors. According to Dang (2011) adequate level of liquidity is positively related with bank profitability. However in this study we found a negative relationship between liquidity ratio and bank profitability measured in terms of Net interest margin. The coefficient estimates of-0.00029 and the p value was 0.0314 which was highly significant at 5% level significance. Holding other factors constant, an increase a100% in the liquidity ratio measured by cash to deposit ratio of banks decreases the profitability of banks has decreased by 27%.

• Housing scheme and bank profitability

In the regression model a housing scheme policy was included, which prohibits private banks from collection of deposit for the housing scheme of Addis Ababa and allows a

government bank only. As it is expected it is found that the housing scheme has a negative impact on the profitability of private banks. This might be due to a customer of private bank may switch or ceases to save in the private banks to the government banks if they subscribe to the scheme. Accordingly the policy introduction of Addis Ababa housing scheme decreases the profitability of private banks by 27% at 10 percent level of significance (see table 4.5).