Determinants of Banks Interest rate spread: An Empirical Evidence from Ethiopian Commercial Banks

The banking sector plays a fundamental role in economic growth, as it is the basic element in the channeling of funds from lenders to borrowers. Efficient financial intermediation is an important factor in economic development process as it has implication for effective mobilization of investible resources. The purpose of this study was examines the bank, industry and macro-economic specific factors affecting banks interest rate spread for a total of eight commercial banks in Ethiopia, covering the period of 2004–2013. To this end, the study adopts a mixed research approach by combining document analysis and in-depth interviews; the collected data was analyzed by using OLS linear regression model. The findings of the study show that credit risk, liquidity risk, operating cost, concentration, reserve requirement, gross domestic product, interest rate volatility and exchange rate volatility have statistically significant and positive relationship with banks interest rate spread. Conversely return on asset, non interest income and financial development indicator has a negative and statistically significant relationship with banks‘ interest rate spread. However, the relationship between management quality and inflation is found to be statistically insignificant. The study concludes that banks in Ethiopia should not only be concerned about internal structures and policies, but they should consider both the internal and external environment together in fashioning out strategies to improve their intermediary efficiency.