Impact of National Bank Regulations on Financial Performance of Commercial Banks in Ethiopia

This study investigates the impact of National Bank of Ethiopia (NBE) regulations on the profitability of commercial banks, using Return on Assets (ROA) as the dependent variable. The study uses an explanatory research design and a quantitative approach. It applied a balanced random effect panel regression model on data from 17 commercial banks over 13 years (2012–2024). The model took into account eight regulatory variables from the NBE and two macroeconomic indicators as control factors. The analysis shows that several regulatory and operational factors positively influence the profitability of commercial banks. These include the Capital Adequacy Ratio (CAR), Minimum Paid-up Capital Requirement (MPCR), Loan-to-Deposit Ratio (LDR), Legal Reserve Requirement (LRR), Branch Expansion Requirement (BER), and Foreign Currency Regulation (FCR). On the other hand, the study found that Non-Performing Loans (NPLs) have a negative and significant effect on ROA. Liquidity requirements have a negative but statistically insignificant effect, indicating they create an opportunity cost without a significant impact. Moreover, the macroeconomic indicators of Inflation and Gross Domestic Product (GDP) both show a negative and insignificant relationship with profitability. This suggests that bank performance is mainly influenced by internal factors and compliance with regulations rather than general economic trends. Based on these findings, the study suggests that commercial banks focus on strict compliance with capital adequacy and minimum paid-up capital requirements as key strategies to improve profitability.