Determinants of Net Interest Margin NIM of commercial banks vary from economy to economy due to country, region and firm specific factors, and variation in social and economic conditions. This research assesses and identifies the determinants of net interest margin in the banking industry of Ethiopia. It mainly used unbalanced panel data collected from annual reports of sixteen commercial banks operating in Ethiopia during the period to Specific macroeconomic data such as RGDP and more » In addition, expert opinions were obtained from bank experts working in both private and public commercial banks to examine the effects of changes in the internal and external factors on the performance of banks.
Analysis was made based on two unbalanced panal data regression models focusing on the banking industry in general and private commercial banks independently. The findings of the study indicate that cost efficiency, implicit interest payment, competition and scale efficiency consistently have positive and significant effects on net interest margin. On the other hand, management efficiency has negative and significant effect on NIM in both cases.
NIM is defined as the difference between the interest received and the interest paid interest cost borne by a bank, as a proportion of its total assets. They use these funds to extend loans of various kinds such as retail loans, working capital, term loans, short term loans, project financing, etc.
This is the interest income. A negative NIM indicates that the cost of funds for a bank is higher than the income that it is able to generate on them. Which is less than optimal scenario. A comparison of NIM across the industry can help demarcate efficient players from inefficient ones as a first measure. Average NIM of all the other players, excluding these outliers has stood at 3. Several institutions have posted a performance lower than the industry average.
The Canadian players have been posting lower NIMs on account of the low key interest rate set by the Bank of Canada, the Canadian central bank over the years. Also among the laggards is Citigroup Inc C , one of the big four banks in the United States, whose average NIM over the last 5 years ended stood at 2. In the case of a player like Citigroup whose assets are worldwide around countries and who is in expansion mode in its growing economies, a deviation from the American average may be expected, as its performance reflects the consolidated performance of its subsidiaries globally.
Finally, the average annual NIM has been consistently increasing, with an average of 3. However, this cannot be considered as an indicator of increasing offtake as the average quarterly NIM has remained rangebound between 3. This is important to note because the Federal Reserve Bank Fed had begun to increase its rates only since December About Us.
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