Unleashing The Power: Unraveling The Effects Of Reserve Requirements On The Thriving Profits Of Ethiopian Commercial Banks

Abstract

This study examined the impact of reserve requirements on the profitability of Ethiopian commercial banks. The study utilized secondary data from the National Bank of Ethiopia's consolidated data and the banks' annual reports to ensure a comprehensive dataset. A quantitative research approach and an explanatory research design were employed using panel data from one state-owned bank and nine private commercial banks over an eight-year period. The target population consisted of sixteen private and one state-owned commercial banks operational from 2015 to 2022, with a sample of 10 banks selected through non-probability purposive sampling. The analysis utilizes descriptive statistics, correlation matrix, and panel data econometric modeling with STATA to investigate the relationships between variables. The findings demonstrated that reserve requirements had a significant negative impact on the profitability of Ethiopian commercial banks, as measured by both ROA and ROE. As reserve requirements increased, the banks experienced decreased returns on assets and equity, indicating a financial burden and reduced profitability. However, control variables such as credit risk, liquidity risk, and deposit fund did not significantly influence ROA or ROE, suggesting that variations in these factors did not have a significant impact on bank profitability in Ethiopia. On the other hand, the study found that bank size had a highly significant and positive effect on both ROA and ROE, indicating that larger banks tended to achieve higher returns, potentially benefiting from economies of scale or other advantages associated with their size. Furthermore, loan production had a statistically significant positive impact on ROE, suggesting that increased loan production led to higher returns on assets for commercial banks.