DETEMINANTS OF SELECTED COMMERCIAL BANKS LENDING DECISION IN ETHIOPIA

Abstract

The main objective of this study was to investigate the determinants of lending decision of commercial banks in Ethiopia. In order to achieve the research objectives, the study used secondary data of 14 state owned and private commercial banks of Ethiopia from 2014 to 2023. The study also used quantitative research approach, descriptive and explanatory type of research design by adopting purposive sampling technique. Bank specific; industry specific and macroeconomic variables were analyzed by using the balanced panel random effect regression model. Eleven variables that affect banks’ lending decision were selected and analyzed. The results showed that bank size, real GDP growth rate, volume of deposit, Return On Asset, Bank concentration were positive and statistically significant while liquidity ratio, exchange rate of birr to dollar, lending interest rate, cash reserve requirement ratio and inflation rate were found to be statistically significant with negative effects respectively on total loans and advanced by commercial banks in Ethiopia. However, credit risk ratio was statistically insignificant with negative effects on commercial banks’ lending decision. Therefore, commercial banks should adjust their lending decision in response to the signals from these factors, such that positive signals like bank size , real GDP growth rate, volume of deposit, Return on Asset and Bank concentration in this study make banks become more favorably disposed to lending.