Determinants of Net Interest Margin in the Ethiopian Banking Industry

Meshesha Demie Jima^1,

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

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

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