Determinants of Bank Lending Decision: Evidence from Ethiopian Private Commercial Banks

The purpose of the study was to investigate the effect of bank-specific factors, regulatory factors, and macroeconomic factors on the lending and advance practices of Ethiopian private commercial banks. The quantitative research approach was utilized by the researcher in order to accomplish the research objective. The analyses were carried out with the help of panel data that was derived from the financial statements of a selection of Ethiopian commercial banks and macroeconomic data that was obtained from the National bank of Ethiopia. The ordinary least square (OLS) technique was used to analyse the data in order to determine the influence that those predictor variables have on commercial bank lending. In the study, the size of the bank, the volume of deposits, the requirement for cash reserves, the credit risk, the liquidity ratio, the lending interest rate, the interest, and the inflation rate of the country were considered to be independent variables. On the other hand, the amount that commercial banks lend or advance was considered to be the dependent variable. According to the findings of the regression analysis, the amount of money that Ethiopian private commercial banks lend out is positively influenced by the size of the bank (assets), the volume of deposits, and the rate of economic growth in the country, while it is negatively influenced by the requirement for cash reserves and the liquidity ratio. On the other hand, credit risk, lending interest rate, and inflation have a negligible impact on the lending and advances that commercial banks in Ethiopia make. According to the findings of the study, Ethiopian commercial banks need to improve their methods for collecting deposits from the general public and should make every effort to increase the size of their asset base. In addition, commercial banks should manage their liquidity and administer their lending activity by taking into consideration internal factors, the existing economic situation, the competitive environment, regulatory measures, and the customers they are trying to attract.