Drivers of Bank Loans and Advances: Evidence from Ethiopian Banking Business

Abstract

This article examines determinants of Ethiopian commercial banks' loans and advances. Seventeen commercial banks' audited financial reports from 2005-2022 and National Bank of Ethiopia and the World Bank data are used. Results from descriptive analysis indicate that commercial banks' loans and advances have increased over the years and their liquidity level has continuously declined. Government-owned bank dominates the private banks in assets, loans, and deposits. Fixed Effects model discovers deposit interest rates, bank size, market concentration, and exchange rate have a positive significant effect on commercial bank loans and advances. Lending interest rate, bank liquidity, Treasury bill rate, country's political risk index and change in banks' minimum capital requirement exerted negative and significant effect on bank loan and advances. The findings have important policy implications for commercial banks and regulatory authorities. Regardless of its relation to loans and advances, it is of paramount importance for commercial banks as players and National Bank of Ethiopia as a policy maker to give its due consideration to liquidity position for the sustenance of public confidence and to have a sound banking sector. It is better that the commercial banks reduce their lending rates to increase the number of borrowers and be beneficiaries of economies of scale. A peaceful and secure political system is necessary to create enabling operating environment for the commercial banks to extend loans and contribute to economic development.