Determinants of Commercial Banks Profitability: Empirical Evidence from Ethiopian Commercial Banks

Abstract

Commercial Banks play an important role in contributing to a country’s economic development. Accordingly understanding factors affecting commercial banks profitability is essential. The main objective of this study is pointing out the variables that have impact on the determination of Ethiopian commercial banks profitability. The data was collected from National bank of Ethiopia annual reports and from 17 Ethiopian commercial banks, which covers from 2005 to 2019. The explanatory variables covered under this study were Bank Specific (Capital Adequacy, Bank Size, Deposit Ratio, Credit Risk and Fund Cost), Macro-Economic (Inflation Rate, Real Economic Growth Rate & Foreign Exchange Rate) and industry specific (Lending Interest rate). ROA, ROE & NIM was used as dependent variables to measure profitability. Fixed effect model with bootstrap estimation was used to analyze the effect of those explanatory variables on ROA. On the other hand, PSCEs regression and PSCEs regression with transformation of the data to logarithmic value were done to ROE & NIM respectively. The STATA 14 output depicts bank size capital adequacy and deposit ratio has a positive and significant relationship with Ethiopian commercial banks profitability. The other important bank specific explanatory variable is liquidity, which has a negative and significant relationship with banks profitability (measured by NIM). the last significant variable is lending interest rate, which has a negative significant influence on ROA & ROE. Unexpectedly the three macro-economic variable haven’t a significant influence on ROA, ROE &NIM. So it is suggested that Ethiopian commercial banks should focus on bank specific and industry specific variables to increase their profitability. Keywords : Commercial Banks Profitability, Ethiopia, Bank Specific, industry specific and Macroeconomic DOI: 10.7176/RJFA/11-15-04 Publication date: August 31 st 2020