Effect Of Monetary Policy on Financial Performance: Dynamic Panel Model Approach: Evidence from Ethiopian Banking Industry

Abstract

This study examines the effect of monetary policy on the financial performance of Ethiopian banking industry. The monetary policy instruments were collected from National Bank of Ethiopia and the World Bank. Audited financial statements from seventeen commercial banks also used in the analysis. The study covered the period of 2011-2022 by using two dependent
variables of return on asset and return on equity as proxy for the financial performance of the banking industry. Two steps system generalized method of moments (SGMM) applied for the empirical analyses. The findings from the regression estimation revealed that return on asset of commercial banks positively and significantly affected by the lagged value of return on asset, deposit interest rate and capital adequacy ratio but negatively and significantly affected by reserve requirement. On other hand, return on equity positively and significantly influenced by the lagged value of return on equity and deposit interest rate. But broad money supply, treasury bill and capital adequacy ratio negatively and significantly affect the return on equity of commercial banks. The results show important policy implications for both commercial banks and regulatory authorities in general. It is advisable for commercial banks to highly work on increasing their deposit collection and improve more on their capital adequacy ratio to make the banking industry strong and competitive business. It is essential for the regulatory authority to strictly follow up for ensuring the broad money supplied to the economy is at optimum level and stable reserve requirement.