Abstract
Financial institutions specifically commercial banks play a significant and energetic role for developing an economy of a country. When the banking sector in a country is functioning in an efficient, effective, and disciplined way it leads to bring a rapid growth in the various sectors in the country. Many factors may impact on profitability of commercial banks. Basically, it can be categorized as bank internal factors and bank external factors. This paper tried to investigate the effect of bank specific factors on profitability of selected commercial banks in Ethiopia. The researcher identified return on asset as a dependent variable whereas bank size, capital ratio and management efficiency as an independent variables. For the achievement of the objectives the researcher collected secondary data in the form of annual audited financial statements from eight selected sampled commercial banks to investigate the effect of selected bank specific factors on profitability for six years from 2013 to 2018. In order to select sampled banks from all the total of 17 commercial banks operating, purposive sampling method was employed. This study adopted an explanatory approach by using panel data research design to fulfill the objectives. The collected data have been analyzed using random effect model of panel data analysis. The results of the study shows that capital ratio and management efficiency are positively related with profitability but bank size negatively related with profitability. Bank size significantly negatively affects profitability, capital ratio insignificantly positively affects profitability and management efficiency significantly positively affects profitability of banks. It is concluded that management efficiency is the major factor of profitability from the variables included in the model.
Highlights
Financial institutions are one of the most important components of any country's financial system
Research Design In order to carry out this study, quantitative data on bank specific factors and profitability measures have been collected from the annual audited financial statements of selected commercial banks operating in Ethiopia
This paper attempted to examine the effect of some selected bank specific factors on profitability of commercial banks in Ethiopia including bank size, capital ratio and management efficiency
Summary
Financial institutions are one of the most important components of any country's financial system. Bank internal or specific factors are bank size, capital adequacy, liquidity risk, operating expense ratio, asset quality, net interest margin, management efficiency and etc (Rudhani et al, 2016 and Abdu et al, 2018). These factors can be controlled by management of the bank. Et al (2016) revealed in their study capital adequacy ratio, bank size, operating expense ratio and gearing ratio have a positive impact on profitability but liquidity and non-performing loans are not important determinants of profitability of commercial banks in Bangladish [2] where as a study by Hirindu and Kushani (2017) found that size, capital ratio, deposit ratio have positive significant factors of profitability of domestic commercial banks in Sri Lankan [11]. The study has the following specific objectives: 1) to examine the effect of bank size on profitability 2) to investigate the impact of capital ratio on profitability 3) to depict the effect of management efficiency on profitability
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