Bank Of Ethiopia Research Articles

A Self-Learning Knowledge Based System for Credit Evaluation of Loan Application: The Case of Commercial Bank of Ethiopia

This study on prototype self-learning knowledge based system (KBS) is focused on evaluation of loan application used to overcome the challenges that resulted from lack of domain experts and poor loan evaluations. We attempted to design and develop a prototype self-learning KBS that provide advisory services for any credit customers and assists the domain experts in evaluation of customer’s requests for the loan. To develop this prototype system, knowledge was acquired using semi-structured interview from domain experts which are selected using purposive sampling technique from Commercial Bank of Ethiopia (CBE) and critique the acquired knowledge. Explicit knowledge is acquired by analyzing the secondary source of knowledge by method of document analysis. Then, the acquired knowledge is modeled using decision tree that represents concepts and procedures involved in credit evaluation and production rules are used to represent the domain knowledge. The prototype system is implemented using SWI Prolog editor tool. To determine the applicability of the prototype system in the domain area, the system has been evaluated and tested by the domain experts. Eighteen (18) test cases were selected purposively. Test cases are equally selected from both ineligible and eligible cases. The overall total performance of the prototype system is 77.71%. The performance of the prototype system is hopeful and meets the objective of the study. The study concludes that the major credit production type that advanced to customer is import letter of credit facility, export credit facility, pre-shipment credit facility and merchandise. The eligibility of application is focused on general and specific criteria. Credit customer is classified as business, corporate and commercial based on the score sheet they achieved. Generally, in this study, the applicability of knowledge of prototype self-learning KBS is proved as hopeful approach in banking industry for credit evaluation. Keywords : KBS, self-learning and credit (loan). DOI: 10.7176/IKM/10-6-03 Publication date: September 30 th 2020

Determinants of interest free financial products in Ethiopian banking industry

This study is undertaken to identify the determinants of the use and adoption of Interest free financial products in Ethiopian banking industry with specific reference to commercial banks. To achieve the aim of the study the primary data was collected from managers of some selected commercial banks through un-structured interview as well as from customers by using convenience method through standard questionnaires. While, secondary data was collected from documents of banks and Journals to triangulate with response obtained from primary data sources. The collected data was analyzed in descriptive and inferential analysis. The findings depicted as the Economic factors like unemployment and saving habits affecting the adoption of Interest free financial products and services by banks. Further, the obsoleting of technological environment, Inflexibility of government policies, Educational background of the customers and diverse cultures of the societies are the other factors that affecting adoption of financial products. In addition, the Interest free financial products and services are not properly used by the customers as the result of their low level of awareness, the perceived relative advantage, perceived compatibility and perceived complexity and perceived trust of existing banking system. Based on the result it is recommended as the banks should properly adopt the Interest free financial products and services with taking into account of the external factors. Further, the banks should participate on aggressive promotion to aware the customers about their Interest free products and services, the government should formulate policies and regulations that minimizing bureaucracy of adopting technology by banks

Does bank regulatory requirements affect risk‐taking behaviour of private banks in Ethiopia?

AbstractThis study examines the effect of monetary policy instruments on bank risk‐taking behaviour of private commercial banks in Ethiopia. Using Panel Dynamic OLS estimator, the empirical results suggested that private banks would take more risks in response to lower regulatory capital ratio, lower reserve requirements, the expansion of domestic credit, and large real asset size in the long run. In addition, the dynamic causal interactions showed that bank risk‐taking Granger causes only bank size in the system, but both capital adequacy and liquidity ratio Granger causes bank risk‐taking and bank size. With estimation results of generalized impulse function, bank risk have generally have a positive shock in response to regulatory capital ratio while a negative shock in response to liquidity for the first two periods. The variance decomposition results also suggested that all variables are relatively exogenous, and the forecast error for all variables is largely explained by their own innovations.

Role of Internal Audit: A Case of Commercial Bank of Ethiopia

The objective of the study was to assess what roles does internal audit plays in the achievement of organizational objectives. To achieve the objective of the study, both qualitative and quantitative analysis methods were employed to investigate primary data, which were collected through interview and questionnaire. Secondary data was also used to some extent. The study result shows that internal audit plays indispensable role on achievement of organization’s objectives through ensuring effective and efficient utilization of resource, advocating ethical conducts throughout the organization, assessing and identifying system inefficiencies and providing recommendation for better achievement. Moreover, findings shows that compliances/traditional audit is the dominant one type of audit practiced. The study also identifies absence of sufficient training, no/little encouragement by management and lower acceptability of findings as major barriers to efficient audit function. Based on the findings the audit department is recommended to extend its scope in assessing risks proactively, create continuous and direct contact with management, to have harmonious relationship and develop their value-adding role. Keywords: audit , internal audit, role DOI: 10.7176/EJBM/12-22-05 Publication date: August 31 st 2020

The Determinants of Capital structure in Ethiopian Private Commercial Banks: A Panel Data Approach

A wrong capital structure decision causes business frailer. However, still, what determinants optimal capital structure decision of companies remain the puzzles of many research scholars. This study is, therefore, aimed to investigate the determinants of the capital structure decision of private commercial banks in Ethiopia. The secondary data were obtained from audited annual financial reports of ten private commercial banks and the National Bank of Ethiopia covering the period of 2010-2018. The panel data were analyzed with a clustered robust random effect regression model. The study reveals that there is a significant positive relationship between earning volatility, size of banks, and taxation with leverage while profitability and asset tangibility are found to have a significant negative effect on the banks' leverage decision. The empirical findings of the study imply that the two capital structure theories, static trade-off and pecking order, are essentially explaining the capital structure decision of Ethiopian private commercial banks. Private commercial banks in Ethiopia should pay due attention to the microeconomic variables without overlooking the macroeconomic condition while articulating their optimal capital mix which can minimize the weighted average cost of capital and enhance the value of the company.

A Study on the Performance of Commercial Banks in Ethiopia

This study examines the impact of financial risks on the profitability of commercial banks for a total of eight commercial banks in Ethiopia, covering the period of 2000-2011. To this end, the study adopts a mixed methods research approach by combining documentary analysis and in-depth interviews. The study reviews the financial records of eight commercial banks in Ethiopia and relevant data on macroeconomic factors considered. The findings of the study show that Credit risk and liquidity risk have a negative and statistically significant relationship with banks’ profitability. However, the relationship for interest rate risk and foreign exchange rate risk is found to be statistically insignificant. Bank size, capital strength and GDP growth were found to be the major factors determining the volatility of profit in Ethiopian commercial banks. The coefficient estimates of the above mentioned controlled variables were positive and statistically significant at 1% significance level. The study suggests that focusing in credit risk management and keeping optimal level of liquidity which enables banks to meet their contractual commitments could maximize return on assets Ethiopian commercial banks. Keywords: commercial banks, profitability, financial risks DOI: 10.7176/RJFA/11-13-04 Publication date: July 31 st 2020

Understanding the Bases and Approaches of Mortgage Valuation in Ethiopia

In Ethiopia there is no mortgage valuation framework or a regulatory valuation institution. Due to this, financial institutions may value mortgage securities without any clear and consistent basis; resulting in confusion among experts and parties dependent on valuations for their business. Further, there is no previous empirical evidence on how banks or financial institutions value mortgage securities. This study is therefore intended to examine the practice of mortgage valuation adopted by Ethiopian banks by looking at valuation bases and their corresponding approaches. To meet this objective the researchers adopted a qualitative research approach where primary data were collected using key informant interviews from experienced valuers at four Ethiopian banks. The collected data were analysed and interpreted using clustering and the data were categorised into relevant themes. The study found that banks undertake mortgage valuation without any valuation basis, and they consider the cost approach as the only recognised valuation approach. Moreover, property valuers do not have sufficient professional competence in valuation and have no discretion to choose the appropriate valuation approaches. Based on the findings of this research, it is suggested that banks apply market value as a basis of valuation. The market value basis is compatible with the property market context of Ethiopia and international practices. The constitution of Ethiopia also supports it. Furthermore, banks should also adopt either the income, market or cost approaches depending on the nature and type of properties. But the cost approach can be applied as a check and balance on the reasonableness of the value determined using another approach and in cases where the two approaches are inappropriate. Valuers should also be able to use their discretion in selecting valuation approaches. These can be realised by establishing an independent national institution responsible for valuation regulation and certification.

Effects of Leadership Styles on Ethiopian Banking Industry Performance

The aim of the study was to examine the effect of leadership styles on organizational performance with specific reference to Commercial banks operate in Jimma Town. To achieve the objectives the study causal type of research and panel design was used to examine the amount of effect that leadership style could exert on the bank’s performance. The primary data sources were leaders on different levels and their subordinate employees while, the secondary data sources were annual report of individual banks and from audit financial report of National Bank of Ethiopia. Multifactor Leadership Questionnaire was adapted for collection of leadership styles representing questions. The descriptive and inferential analyses was conducted to analyze the collected data. Subsequently, the researcher employed Random Effect Model to investigate the extent of relationship between independent variables and dependent variables. The study results revealed that both transformational and transactional leadership have strong positive effect on the ROA. Thus, transformational that brings changes in working environment by inspiring and motivating employees for changes, creation, innovation, to go beyond from what they actually think they can; and transactional that reward employees and make recognition in exchange for the work they perform, giving close directions and guidance have positive and significant effect in promoting the performance of the bank. Based on the study results the provided recommendation was that the leaders of banks should focus on playing a role model by taking first step of what they talk about and keep consistent in their action in way that getting trust and loyalty from employees and in instilling confidence, commitment and vision in employees and the Stakeholders in the industry should consider taking banking in a non-traditional direction by placing more emphasis on understanding leadership style and its effects on improving results. Keywords : Effect; Leadership Style; Performance; Banks; Jimma; Ethiopia DOI: 10.7176/EJBM/12-16-02 Publication date: June 30th 2020

The Effect of Asset- Liability Management on Profitability of Private Commercial Banks in Ethiopia

This research was conducted to investigate the effect of asset liability management on profitability of private commercial banks in Ethiopia by using panel data of seven private commercial banks in Ethiopia from year 2005 to 2017 G.C.The study used audited annual financial report of selected banks and analyzed by using multiple regression models moreover, net interest income, was to measure profitability.Fixed effect regression model was applied to investigate the effects of Asset Liability factors on banks, by employing statistical Cost Accounting model for the sampled banks. To conduct the study quantitative research method was employed and explanatory research design was used in trying to establish the causal effect relationship between profitability and asset liability management variables The study utilized panel data analysis methodology in attest conclusions about the effect of the explanatory variables on the dependent variable. The study revealed that loan and advances, deposit in foreign banks, and investment in security had a statistically significant and positive except loan and advance effect on net interest income, whiledemand deposit had a statisticallysignificant positive effect on net interest income. Whereas saving deposit and fixed deposit from the liability part, don’t have statistically significant positive effect on profitability as measured by net interest income.Therefore, Bank managers are advised to give due attention to the statically significant positive variables (I.e, deposit in foreign bank, investment in security) to Improve profitability. Keywords:- Profitability, Private commercialbanks, asset liability management, Ethiopia DOI: 10.7176/RJFA/11-9-04 Publication date: May 31 st 2020

Determinants of Deposit Mobilization in the Case of Commercial Bank of Ethiopia Selected Branches

Deposit mobilization is among one of the primary activities of banking system. Banks mobilize financial resource required for investment and economic growth from households, business, corporate bodies and government. To be effective, competitive in the market and maintain liquidity identifying factors affecting deposit mobilization is crucial. With this in mind the objective of this study is to identify determinants of bank deposit mobilization in the case of Commercial Bank of Ethiopia. To achieve this objective primary data collected through distributing 238 valid questionnaires to selected customers of the bank is primarily used. To complement primary data, secondary data is also used to some extent. Data analysis is handled quantitatively through the help of SPSS. The study findings shows that branch expansion, variety of services offered by the bank, confidentiality of customer information, trust on banking system and saving habits are found to be significant variables affecting deposit mobilization. More over interest rate and inflation are also among significant macroeconomic factors affecting deposit mobilization. Based on these findings recommendations are also forwarded. Keywords: Bank Deposit, Commercial Banks DOI: 10.7176/EJBM/12-13-04 Publication date: May 31 st 2020

THE DETERMINENTS OF COMMERTIAL BANKS FINANCIAL PERFORMANCE IN ETHIOPIA.

The study was attempted to investigate determinants of financial performance of commercial banks in Ethiopian by using secondary data. The data were obtained from audited financial statements of five sampled commercial banks for the period of 1997 to 2017 and National Bank of Ethiopia. The study used return on assets (ROA) and return on equity (ROE) as dependent financial performance variable. Moreover, the study used bank specific variables as explanatory variables. Both descriptive statistics and econometrics model specifically fixed effects estimation were used to analyze the relationships of dependent variable with explanatory variables. The major findings of the study shows that bank specific determinants were very important in explaining financial performance of commercial banks. The management efficiency, customer deposit to total asset ratio, capital adequacy ratio, loan to deposit ratio were positively and significantly related to bank’s financial performance. The study recommends that banks put a lot of focus on their own internal processes since bank specific factors have the biggest impact on their profitability. Most importantly, Ethiopian commercial banks should invest in expand in new geographical area and also upscale their innovation leading to products attractive to consumers. Competition, which is the main industry specific factor affecting profitability, should be handled through well designed marketing strategy.

Chloroplast Genome Sequence Variations and Development of Polymorphic Markers in Coffea arabica

Coffee is a popular beverage in the world and a valuable agricultural export commodity for several developing countries. Coffea arabica is one of the widely cultivated species and is believed to have originated from Ethiopia. Currently, a large number of C. arabica accessions are conserved ex situ in field gene banks in Ethiopia. However, there is no useful molecular barcoding to identify the conserved accessions, which presents a challenge to sustainable utilization of this economic species. To identify polymorphic chloroplast markers for the use in various studies, the complete chloroplast genome sequences of 24 C. arabica accessions were assembled and screened for variable regions in this study. The total length of the individual chloroplast genome sequence varied from 155,059 to 155,192 bp. Genome annotation revealed a total of 114 unique genes, consisting of 80 protein-coding, 30 tRNA, and four rRNA genes in all the 24 genomes. Twenty-four polymorphic regions were identified and developed. Most (71%) of the variable regions were found in non-coding sequence, and 54% of the variations detected are single base pairs. Three non-synonymous SNPs were found in accD, rpoA, and ycf1 genes. The markers developed were able to cluster the majority of the coffee accessions according to their geographical regions of collection. Five out of 24 newly developed markers were validated by assessing the diversity levels that were assessed in five original regions. The southwest region displayed the highest genetic diversity (HE = 0.224; I = 0.370) and might become a potential coffee genetic resource bank. Overall, the polymorphic markers developed and validated in this study could be a useful genomic resource for molecular breeding, identification, and biogeography studies of this commercially important crop.

Does IFRS Adoption Improve Financial Reporting Quality? Evidence from Commercial Banks of Ethiopia

The main purpose of this study is to analyze International Financial Reporting Standard (IFRS) adoption and quality of financial reporting by commercial banks in Ethiopia using qualitative characteristics of accounting information such as: Relevance, Understandability, Comparability, and Faith Representation. The study used the perceptions of preparers of banks financial reports (accounting & finance officer, finance managers as well as IFRS implementation team members) to analyze about IFRS adoption in commercial banks. The study adopted mixed research approach and descriptive research design. More specifically, the study used purposive sampling technique to collect a data; the data was collected through primary and secondary source of data. The primary data was collected through questionnaire and secondary data was from different source of documents. The data was analyzed using descriptive statistics. The finding of the study reveals that; the quality of financial report which is measured through (relevance, understandability, comparability and faith representation) was improved after adoption of international financial reporting standards. Keywords: IFRS adoption, financial reporting quality, relevance, understandability, comparability, faith representation , commercial bank , Ethiopia. DOI: 10.7176/RJFA/11-7-03 Publication date: April 30 th 2020

The adoption of financial technology in Ethiopia: a study of bank customers perspective

Developing countries like Ethiopia in Africa highly striving to adopt financial technologies in order to modernize the financial system. However, the acceptance of financial technologies from consumers’ side faces many challenges. Financial technologies include the electronic-based platforms that designed by bankers to allow their customers for accessing financial services whenever they demand it without time and distance barriers. Those technologies considered in this study includes; internet banking, mobile banking, and card banking. The aim of this study was to identify factors that determine bank customers’ intention to adopt e-finance technologies in Ethiopia. It was confirmatory study to validate the integration of technology acceptance model (TAM) with customer awareness and subjective norm factors. Self-administered questionnaires were distributed to 412 bank customers from technologically leading banks in Ethiopia. The structural equation model (SEM) analysis was used for testing the hypotheses. The major findings of the study revealed that bank customers’ intention to adopt the financial technology was influenced positively by customer awareness, subjective norm, and perceived usefulness. The integration of customer awareness and subjective norm with the TAM results in a parsimony model to measure the acceptance intention of financial technologies. The study forwarded scientific recommendations for bank practitioners and policy makers.

Factors Affecting the Performance of Commercial Banks (A Case Study on Commercial Banks in Ethiopia): CAMEL Ratings

This study tried to assess factors affecting the efficiency and performance of Ethiopian commercial banks. Nine years audited financial data (i.e.2010-2018) was used to analyze the effect of explanatory variables on the explained variables using explanatory research design with quantitative research approach. Banks play a great role in the development of the countries. They act as financial intermediaries between the parties with lack of capital and parties with surplus capital. In order to perform their functions first their financial healthiness should be improved. In this study performance of the banks was measured by ROA and efficiency of the banks by efficiency ratio. On the other hand, factors that could be affect the performance of the banks were capital adequacy, assets quality, management capacity, earning quality, liquidity position, GDP and age of banks were used using different measurement mechanisms. Random effect GLS regression result indicated that management capability, assets quality and earning quality significantly affect the performance of the banks measured by ROA. On the hand, assets quality, earning quality, liquidity and age of the banks has significant effect on the efficiency of the banks. Capital adequacy, GDP and age of the banks have no impact on the ROA, and capital adequacy, management capacity and GDP do not have significant effect on the performance of the banks measured by efficiency ratio. According to the finding, management capability and earning quality have positive effect on the performance of the banks. Keywords: CAMEL, ROA, Performance of the banks, Efficiency ratio and commercial banks DOI: 10.7176/RJFA/11-5-01 Publication date: March 31 st 2020

Challenges and Opportunities of Expansion of Islamic Banks in Ethiopia: Case of Commercial Bank of Ethiopian Dire Dawa Interest Free Branch

This study assessed the challenges and opportunities of expansion of Islamic banks in Ethiopia in case of commercial bank of Ethiopia Dire Dawa interest free branch. For sake of obtaining sufficient data, the researcher mainly used primary data that would be collected through open ended and close ended questioner from employees of commercial bank of Ethiopia Dire Dawa interest free branch. In addition to questioner, interview was conducted with branch manager of Dire Dawa interest free branch and higher officials of Islamic banks in the process of establishment. The secondary data also would be gathered through document review to support the primary data. To analyze the questioner SPSS soft ware would be used. Based on the analysis and interpretations the main findings of this study was an Islamic bank have both opportunities and challenges in their expansion. The main challenges are higher computation from conventional banks that open interest free banking service in branch and window level, lack of awareness of the society regarding Islamic banks, professional skill gap regarding Islamic banks operation and lack of awareness of the society regarding Sharia based financing. The main opportunity of Islamic banking expansions are there is high demand in the market, the banking industry in Ethiopia is in growth stage and Islamic banks can mobilize more addition deposits from Muslim society which was out banking industry. Keywords: Islamic banking, Conventional banks and Interest free banking DOI: 10.7176/RJFA/11-3-05 Publication date: February 29 th 2020

Determinants of Credit Risk : The Case of Selected Commercial Banks in Ethiopia

Risk assessment is the careful analysis and evaluation of the diverse factors that can bring risks. Risk assessment provides the banks an opportunity to determine the vulnerabilities and risk associated with a banking system. The aim of this study is to assess determinants of credit risk in selected commercial banks in Ethiopia. To this end, secondary data from ten commercial banks over the period 2010 to 2017 were collected from the audited financial statement of the selected banks available in the National Bank of Ethiopia. The assumption tests were made and indicate the fitness of data for further tests and also the post estimation tests recommend pooled ordinary least square for the regression analysis. The result indicated that predictor variables like efficiency ratio, return on equity and bank size have statistically significant positive effects on the dependent variable (credit risk). In addition, the study showed that capital adequacy had statistically significant negative effect in predicting the dependent variable, credit risk. However, predictor variables like return on asset, leverage and loan to deposit ratio didn’t make any statistically significant effect on credit risk. Finally, it was recommended that, commercial banks in Ethiopia are advised to become more effective, in management to use funds contributed by shareholders, in spending sufficient resources on analyzing loan application, introduction of modern risk management technology, that are believed to improve the effectiveness of commercial banks in Ethiopia.

Determinates of Capital Structure in Case of Private Commercial Banks in Ethiopia

This study was conducted on the title determinants of capital structure; evidence from private commercial banks in Ethiopia. To find out what determines capital structure, seven bank specific explanatory variables (Profitability, tangibility, growth, age, tax shield, size and liquidity) was selected and regressed beside the suitable capital structure measure (Debt to Equity Ratio). Fourteen private commercial banks, which had minimum of seven years life were selected for the study. Their audited financial statement from 2013 to 2019 was used as major source of data. Before the analysis of regression model test of CLRM assumptions such as normality, multicollinearity, heteroscedastcity and autocorrelation tests were conducted on the data. After these tests, Hauseman model specification test conducted and its result indicated that Fixed Effect Model was better to test hypotheses that emerge through the review of existing literature. Then inferential statistics regression was done by Fixed Effect Model (FEM). The regression result reveled that profitability, age, tax shield and size had significant effect on leverage. However, among the hypothesized capital structure determinants growth, asset tangibility and liquidity had insignificant effect on capital structure of Ethiopian private commercial bank. In addition, trade-off theory and the pecking order theory explained the capital structure behavior of banking industry in Ethiopia.

A Comparative Financial Performance Analysis of Some Selected Private Commercial Banks of Ethiopia: A CAMEL Approach

This study was aimed at measuring the financial performance of some selected private banks in Ethiopia. The financial performance of selected banks has been measured by using the five too important components of financial measures; those are capital adequacy, asset quality, management capacity, earning capacity and liquidity of banks. To this end necessary audited financial statements and related disclosures of selected private banks, which were prepared in line with international financial reporting standards for three consecutive years from 2017-2019 have been used. The collected secondary data have been analyzed by using a ratio analysis model. In line with comparison of selected private banks each other, the study revealed the following results. When Capital adequacy is used as a performance measure, comparatively Addis international bank is treated as capitally adequate and safe for creditors and depositors in repaying the loan what it is received. Abay bank, Dashen bank and Abyssinia bank jointly treated as relatively safe and capitally adequate next to Addis international bank. In terms of asset quality, awash international bank relatively treated better in managing credit followed by bank of Abyssinia and Addis international bank. When management efficiency is used as a performance measure of banks, Addis international bank is comparatively efficient in utilizing its assets to generate income a lot as compared to the remaining banks under study. In its earning quality, awash international bank has selected as the leader of the remaining banks. The study also concludes the performance of banks in terms of liquidity as one component of CAMEL, based on the analysis Abay bank outperforms the remaining banks.

The Impact of Financial Leverage on the Performance of Commercial Banks: Evidence from Selected Commercial Banks in Ethiopia

The financing decision function of corporate finance deals with determining the best financing mix or capital structure of the firm in order to maximize the value of firm or wealth of owners. In Ethiopia, Commercial Banks use a combination of debt and equity source of finance in their capital structure. Each source of finance has its own cost of capital in the capital structure and hence effect on value of corporation. The ratio used to measure the proportion of debt to equity is considered as Financial Leverage. The main objective of this study is to investigate the effect of financial leverage on the financial performance of Ethiopian Commercial Banks for the period of 10 years (2008-2017) for the 5 selected commercial banks. As a measure of financial leverage for the independent variables three variables such as Debt ratio (DR), Debt Equity ratio (DER) and Interest coverage ratio (ICR) (times interest earned ratio) were used. As a measure of financial performance, the dependent variable two ratios such as return on asset (ROA) and return on equity (ROE) were used. The ex-post facto and longitudinal research design were used. The secondary data were collected from the audited financial reports (profit and loss statement and statement of financial position) of selected commercial banks operated in Ethiopian financial system. Descriptive statistics and Fixed Effect model were used. The result of the study showed that, Debt Ratio (DR) has a negative insignificant effect on Banks’ performance measured by Return on Assets (ROA) and Return on Equity (ROE) while Debt Equity Ratio (DER) And Interest Coverage Ratio (ICR) have significant positive Effect on Banks’ performance measured by Return on Assets (ROA) and Return on Equity (ROE).