IJSRP, Volume 6, Issue 6, June 2016 Edition [ISSN 2250-3153]
This paper analyzes the factors affecting the commercial bank of Ethiopia’s (CBE’s) net interest margins during 2005 to 2014, a period characterized by increasing the bank’s net interest margin. The pooled ordinary multiple regression models are used to estimate the results without compromising the classical linear regression assumptions. In line with findings in the previous literature, this paper finds that capital adequacy (risk aversion), credit risk, operating costs, degree of competition (Lerner index) and deposit growth rate are the most important drivers of CBE’s net interest margins. Almost all variables in the model indicates a positive and highly significant association ship with net interest margins, and are found to be the most important bank specific factors that determine the net interest margin of the bank, CBE. The results of the study also suggests that high concentration led to lower competition, and thereby increase the net interest margins of banks, especially the dominant bank like CBE in case of Ethiopia. All in all, the results suggests that there has to be a measure to be taken by the sector to reduce the banks concentration ratio, operating costs, risk premium on credits, and increase the level of capital to offer competitive interest margins and fairly shared growth rates in deposits among others. In doing so, this paper conclude that further structural reforms and merger or consolidation enter alia may lower CBE’s net interest margins and share the market potentially fairly to other private banks operating in the industry.