Determinants of Commercial Banks Profitability: The Case of Commercial Banks in Ethiopia

Abstract

Banks are the most crucial financial intermediaries in our country and the economy that have profitable banking industry are better able to withstand negative shock and contribute to the stability of the whole economy. Both internal and external determinants of Bank profitability affect the profitability of Commercial Banks in Ethiopia. The purpose of this study is to investigate determinants of commercial banks profitability in Ethiopia by using panel data of eleven commercial banks from year 2009 to 2018. The bank's Audited financial statement, National Bank of Ethiopia and Ministry of finance and Economic Cooperation has been the main source for the study. The study had a population of 18 commercial banks in Ethiopia and out of the total population only 11 commercial banks were included by using judgmental sampling technique. The study used quantitative research approach and secondary financial data were analyzed by using panel regressions models for the bank profitability measure, Return on Asset (ROA). Random effect regression model was applied by using stata13 software. The findings of the study show that bank size, capital adequacy, liquidity risk, operational efficiency, gross domestic product and income diversification have statistically significant and positive effect on bank’s profitability. On the other hand, variables like liquidity risk and operational efficiency, banking sector development have a negative and statistically effect on banks’ profitability .However, funding cost, inflation, and foreign exchange rate are found to be statistically insignificant. The study suggests that focusing and reengineering the banks alongside the key internal and external drivers could enhance the profitability as well as the performance of the commercial banks in Ethiopia Keywords: profitability, Return on Asset, Bank size, Capital Adequacy, Liquidity risk, operational efficiency, Funding cost, RGDP, Inflation rate , Foreign exchange rate, income diversification, and commercial banks. DOI: 10.7176/RJFA/13-11-04 Publication date: June 30 th 2022