Abstract:
Commercial Banks, as the main part of financial system, play an important role in contributing
to a country’s economic development by providing funds for government, corporation and
individuals. Accordingly understanding factors affecting commercial banks’ loan and advance is
essential, since provision of loan and advance is the basic source of revenue for banks. The main
objective of this study was investigating factors that determine the loan and advance of banks
under the study period, covering from 2008 to 2017, using unbalanced panel data from 17
Ethiopian commercial banks annual report. In this study census enquiry was carried out and the
researcher used survey method from the quantitative research approach, which allows to collect
quantitative data that is analyzed quantitatively using STATA 12 econometrics software. The
variables covered under this study were both bank specific (volume of deposit, bank size,
liquidity ratio, lending interest rate and capital adequacy) and macroeconomic factors (GDP,
inflation and foreign exchange rate). The random effect regression output shows that from bank
specific explanatory variables; all variables show significant effect but with different signs
volume of deposit and lending interest rate has positive sign while bank size, liquidity ratio and
capital adequacy have a negative sign on loan and advance. From macroeconomic explanatory
variables; foreign exchange rate only has positive and significant effect on Ethiopian
commercial banks’ loan and advance. On the other hand, GDP and inflation rate were
insignificant with positive and negative signs respectively.
