Is it possible to make Banking Industry free for International Banks? (An empirical study to investigate the Capital Adequacy of the industry in Ethiopia)

The objective of the study was to examine the determinants and level of capital adequacy of the banking industry using empirical model. In order to address the objective, the paper used a panel data set that employed bank-level data from a sample of eight banks covering the period 2000–2013 and estimated the dynamic panel data model with generalized method of moments (GMM). On top of this, descriptive statistic was used to assess the level of average capital adequacy ratio of the banks. The finding shows that, lagged value capital adequacy, portfolio risk, average capital adequacy of the industry and asset size are significant factor that affects the capital adequacy ratio of banking sector in Ethiopia. Moreover, except the alternative cost of capital, the other hypotheses are in line with previous studies. In a similar vein, the descriptive statistic has shown that, the average CAR of the banking sector is much greater than the international standard of 8.1% which indicates the sector is in a good position in terms of capital adequacy. Therefore, the researcher concluded that, the banking sector, especially the largest banks, are capable to compete with international banks if the market for the industry is free for foreign banks to join the market, citreous paribus (such as management skills, workers experience, business environment, etc.).