Abstract
This study examines the impact of financial risks on the profitability of commercial banks for a total of eight commercial banks in Ethiopia, covering the period of 2000-2011. To this end, the study adopts a mixed methods research approach by combining documentary analysis and in-depth interviews. The study reviews the financial records of eight commercial banks in Ethiopia and relevant data on macroeconomic factors considered. The findings of the study show that Credit risk and liquidity risk have a negative and statistically significant relationship with banks’ profitability. However, the relationship for interest rate risk and foreign exchange rate risk is found to be statistically insignificant. Bank size, capital strength and GDP growth were found to be the major factors determining the volatility of profit in Ethiopian commercial banks. The coefficient estimates of the above mentioned controlled variables were positive and statistically significant at 1% significance level. The study suggests that focusing in credit risk management and keeping optimal level of liquidity which enables banks to meet their contractual commitments could maximize return on assets Ethiopian commercial banks. Keywords: commercial banks, profitability, financial risks DOI: 10.7176/RJFA/11-13-04 Publication date: July 31 st 2020
Highlights
Profitable and strong banking system stimulates larger financial stability and rises the economy’s resilience to adverse macroeconomic shocks
Broad objective and hypotheses The broad objective of this study is to examine the impact of financial risks on profitability of commercial banks in Ethiopia controlling the influence of some selected macro and bank specific variables
Results of Regression Analysis There are broadly two classes of panel estimator approaches that can be employed in financial research: fixed effects models (FEM) and random effects models (REM) (Brooks 2008)
Summary
Profitable and strong banking system stimulates larger financial stability and rises the economy’s resilience to adverse macroeconomic shocks. A healthy and sustainable profitability is significant in maintaining the stability of the banking system and for sustainable economic growth in general (Tafri, et al, 2009). The reform encouraged private banks to enter and expand their operations in the industry. Such growth has taken place, as indicated in the National Bank of Ethiopia (NBE) 2010/11 annual report the banking system in Ethiopia is underdeveloped. Ethiopian banks are characterized by operational inefficiency and insufficient competition (Lelissa (2007) and Abera (2012)). To improve banking sector efficiency it is worthwhile to identify the main factors which affect banks profitability
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