Journal of Finance and Economics
ISSN (Print): 2328-7284 ISSN (Online): 2328-7276 Website: http://www.sciepub.com/journal/jfe Editor-in-chief: Suman Banerjee
Open Access
Journal Browser
Go
Journal of Finance and Economics. 2017, 5(3), 96-104
DOI: 10.12691/jfe-5-3-2
Open AccessArticle

Determinants of Net Interest Margin in the Ethiopian Banking Industry

Meshesha Demie Jima1,

1Principal Research and Development Officer, Commercial Bank of Ethiopia, Addis Ababa, Ethiopia

Pub. Date: April 14, 2017

Cite this paper:
Meshesha Demie Jima. Determinants of Net Interest Margin in the Ethiopian Banking Industry. Journal of Finance and Economics. 2017; 5(3):96-104. doi: 10.12691/jfe-5-3-2

Abstract

Determinants of Net Interest Margin (NIM) of commercial banks vary from economy to economy due to variation in country, industry and firm specific factors. This study aims to assess and identify the determinants of NIM in the Ethiopian banking industry. It mainly used unbalanced panel data collected from annual reports commercial banks and the National Bank of Ethiopia for the period 1997 to 2014. Specific macroeconomic data such as Real GDP and Inflation were collected from annual reports of Ministry of Finance and Economic Development. In addition, expert opinions are obtained from officials operating in both private and public banks and used to examine the effects of changes in internal and external factors on the performance of banks. Fixed Effect unbalanced panal data model is used for data analysis. The findings of the study indicated that cost efficiency, implicit interest payment, competition and scale efficiency consistently have positive and significant effects on NIM. On the other hand, liquidity risk and management efficiency has negative and significant effect on NIM. However, macroeconomic variables like inflation and gross domestic product do not seem to have significant effect on NIM. From this finding it is possible to conclude that both bank specific and industry factors are indispensable determinants of commercial banks’ performance in Ethiopia. This, in turn, shows that operational efficiency and business growth are important areas of emphasis to register optimal return. Thus, bank executives, bank advisors and the monetary authority of Ethiopia need to focus on these two pillars performance to ensure optimal NIM in banks.

Keywords:
net interest margin banking industry macroeconomic variables banking performance

Creative CommonsThis work is licensed under a Creative Commons Attribution 4.0 International License. To view a copy of this license, visit http://creativecommons.org/licenses/by/4.0/

References:

[1]  Angbazo, L. 1997. “Commercial bank net interest margins, Default risk, interest rate risk and off-balance sheet banking”. Journal of banking and finance, 21, 55-87.
 
[2]  Athanasoglou, B. P., Delis, M. D. and Staikouras, C. K., 2006. Determinants of bank profitability in the South and Eastern European region, Bank of Greece Working Paper No. 47.
 
[3]  Belayneh H. 2011. Determinants of commercial banks profitability: an Empirical Study on Ethiopian Commercial Banks; Master Thesis, Addis Ababa University.
 
[4]  Bernanke, Ben, 1983. “Nonmonetary effects of the financial crisis in the propagation of the great Depression”, American economic review, 73, 257-76.
 
[5]  Boyd, J.H., L. Ross and S. Bruce, 2001. The impact of inflation on financial sector performance. Journal of Monetary Economics. No. 47. pp. 221-248.
 
[6]  Brock, Philip and Helmut Franken. 2002. “Measuring the Determinants of average and marginal bank interest rate spreads in Chile, 1994-2001”. Mimeo central bank of Chile.
 
[7]  Brock, Philip and Liliana Rojas-Suareza., 2000. “Interest Rate Spreads in Latin America.” In Why So High? Understanding Interest Rate Spreads in Latin America, edited by Philip Brock and Liliana Rojas-Suarez, pp. 1-38. Washington, D.C.: Inter-American Development Bank.
 
[8]  Carbo-Valverde, Santiago and Francisco Rodriguez-Fernandez, 2007. “The Determinants of Bank Margins in European Banking” Journal of Banking and Finance, 31(7), 2043-2063.
 
[9]  Demirguc-Kunt, Asli and Harry Huizinga, 1999. “Determinants of Commercial Bank Interest Margins and Profitability: Some International Evidence.” World Bank Economic Review, 13(2).
 
[10]  Doliente, J. S., 2005. Determinants of bank net interest margins in Southeast Asia, Applied Financial Economic Letters, 1, 53-7.
 
[11]  Estrada, Dairo, Esteban Gómez and Inés Orozco, 2006. “Determinants of interest margins in colombia”. Borradores de economia. No. 393.
 
[12]  Gelos, r. Gaston. 2006. “Banking spreads in Latin America”, IMF Working paper, 06/44.
 
[13]  Hawtrey, K. And H. Linag, 2008. Bank interest margins in OECD countries, North American Journal of Economics and Finance, 19, 249-260.
 
[14]  Ho, Thomas S. Y and Anthony Saunders, 1981. “The determinants of bank interest margins: theory and empirical evidence”. Journal of financial and Quantitative analysis, Vol. xVi, No. 4, 1981.
 
[15]  Horváth, R., 2009. Interest margins determinants of Czech banks. Charles University Prague, Faculty of Social Sciences. – No. Working Papers IES 2009/11.
 
[16]  Jude, S.D., 2005. Determinants of bank net interest margins in Southeast Asia, Applied Financial Economics Letter, 1, pp. 53-57.
 
[17]  Khawaja, Idrees and Musleh-ud Din. 2007. “Determinants of interest spreads in Pakistan”, Pakistan institute of Development economic Working papers, 22, 2007.
 
[18]  Liebeg, David and Markus S. Schwaiger, 2006. “Determinants of the interest rate margins of Austrian banks”, Oesterreichische national bank financial stability report, No. 12, 104-116.
 
[19]  Maudos, Joaqúin and Juan Fernández de Guevara, 2004. “Factors explaining the interest margin in the banking sectors of the European Union”, Journal of banking and finance, No. 28, 2259-2281.
 
[20]  Mishkin, F. S., 2004. Can Inflation Targeting Work in Emerging Market Countries? NBER, WP.10646.
 
[21]  Naceur, B. Samy, 2003. “The determinants of the Tunisian banking industry profitability: Panel Evidence”. Universite Libre de Tunis, Department of finance Working Paper 2003.
 
[22]  Ndung’u, N. and Ngugi, R.W., 2000. Banking Sector Interest Rate Spreads in Kenya, Kenya Institute for Public Policy Research and Analysis Discussion Paper, No. 5.
 
[23]  Perry, P., 1992. Do Banks Gain or Lose From Inflation. Journal of Retail Banking, No. 14(2): 25-30.
 
[24]  Quaden, G., 2004. Efficiency and stability in an evolving financial system, www.bnb.be/Sg/En/Contact/pdf/2004/sp040517en.pdf; December, 2015.
 
[25]  Saunders. A. and l. Schumacher. 2000. “The determinants of bank interest rate margins: an international study”. Journal of international money and finance, No. 19.
 
[26]  Valverde, S. C., Del Paso, R. L. and Fernandez, F. R. 2004; Banks, Financial Innovations and Regional Growth, www.ugr.es/franrod/ingrowth04.pdf; January 2016.
 
[27]  Wong, K., 1997. Determinants of Bank Interest Margins under Credit and Interest Rate Risks. Journal of Banking and Finance, No. 21.