Determinants of Lending Interest Rate: Dynamic Panel Model Approach Evidence From Commercial Banks in Ethiopia

Abstract

This study examines factors that influence lending interest rate in Ethiopian commercial banks.  Audited financial statements from seventeen commercial banks, National Bank of Ethiopia and the World Bank are used in the analysis. The study covers the period of 2011-2022. Two steps system generalized method of moments (SGMM) is used to conduct the empirical analyses. The findings from the regression estimation revealed that lagged value of lending interest rate, and broad money supply positively and significantly influence lending interest rate whereas bank profitability, provision for non-performing loans, required reserve ratio, GDP growth rate and treasury bill rate have negative and significant influence on lending interest rate of Ethiopian commercial banks. The results show important policy implications for both commercial banks and regulatory authorities in general. Hence, the optimum broad money supply, higher domestic output, improving investment on non-interest income and stable reserve requirements are essential for stable lending interest rate in Ethiopia.

Keywords: banks; deposits; income; lending rate; generalized moment method; Ethiopia