Impact of reducing loan by Ethiopian banks on their own performance

Abstract

This study intends to assess the impact of reducing or restricting loan disbursement on the performance of banks in Ethiopia. It also attempts to examine the possible factors that compel the banks to reduce or restrict lending. Quantitative method particularly survey design approach was adopted for the study. The survey was conducted with individuals working in both private and state owned banks in Ethiopia (assuming different positions) using self administered questionnaire. In addition, the study used structured review of documents and/or records held by banks. The findings of the study show that deposit and capital have statistically significant relationship with banks’ performance measured in terms of return on equity (ROE). New loan and liquidity have relationship with banks’ performance measured in terms of both return on asset (ROA) and ROE. However, the relationship is found to be statistically insignificant. Deposit and capital have no statistically significant relationship with banks’ performance in terms of ROA. The study suggests that when banks face lending constraints, they have to use their funds like by purchasing treasury bills and bonds. Moreover, banks must develop non-interest generating services. Excess cash maintained by banks should be used by diversifying credit options and to avoid inefficiencies.