The Impact of Policy Measures on Ethiopian Private Banks Performance: the Case of Government Bill Purchase

The major theme of the study is to assess the effect of sector specific policy measures on bank performance. The study has taken one of the top policy issues; the requirement to purchase government securities, and analyzed its impact on profitability measure, ROA. It has used panel data from 2007-2013 of eight middle size private banks with a total of 56 observations. The study finds that exposure to government bills has negative significant relationship with performance. Nevertheless, the magnitude is not severe. Moreover, the pre and post policy periods comparison revealed a relatively better profitability record for private banks during times of policy restrictions.  Therefore, the bill seems contributed positively to performance via moping the excess liquidity holding of banks or to invest excess funds in earning government securities than the customary practice of holding liquid asset in zero earning accounts at the NBE. In addition, it instigated banks to some extent provide focus on other fee generating sources. The significant relation of the NIM with performance revealed that banks responded to the policy through adjusting their loan prices in a way to compensate for the opportunity lost. Consequently, the Banks cost related to bill purchase to some extent seems covered by borrowers but the increase in rate has not resulted in materialized high default risk. In general, the result of the study shows that the effect of the policy measure is mitigated by the excess liquidity standing of banks during the policy formulation, the likely possibility to expand to other fee generating services, stable liability prices and banks discretion to adjust their asset prices. Nevertheless, the decline trend in the share of loans from the total asset could have negative effect on the long run which in fact to some extent will be moderated by the maturity of part (but significant sum) of the bills in few years time.  The study focused on the historical impact of the bill measure; hence its long run effect requires further exploration. Keyword s : Policy Government Bill Ethiopian Bank Performance