Abstract
The objective of this study is to empirically assess the effect of bank-specific and macroeconomic determinants of Ethiopian private commercial banks financial performance using three measures namely, return on assets (ROA), return on equity (ROE) and economic value added (EVA) for the period 2006 to 2015 by using multiple regression on a sample of seven private commercial banks. The results indicated that performance persists to some extent, indicating the existence of relatively fair competitive market in private commercial banking environment. Regarding the explanatory variables from bank-specific determinants, Capital adequacy (CAP has a significant and positive relation with ROA and significant and negative relation with ROE and EVA. In addition, ASQ has a significant and negative relation with ROA and insignificant and negative relation with ROE and EVA. Whereas ME affect bank performance (ROA, ROE and EVA) significantly and negatively. On the other hand, LIQ and BS affect bank performance (ROA, ROE and EVA) significantly and positively. Furthermore, GDP has an outsized positive and significant effect on both ROE and EVA but an insignificant effect on ROA. Therefore, Ethiopian commercial banks policy makers and managers should give high emphasis on CAP, ASQ, ME, LIQ, BS and GDP as these were found to have significant effect on private commercial banks financial performance. Key words: Financial performance, return on assets (ROA), return on equity (ROE) and economic value added (EVA).
Highlights
In any economy there are five basic components of financial environment
To test the relationship between the private commercial banks financial performance measures (ROA, return on equity (ROE) and economic value added (EVA)) and the identified determinants, the theoretical model is developed based on the finance theory from the methodological part of this study
The correlation coefficient for bank size and capital adequacy of -0.535529 (p value=0.0000) indicating bank size is closely related to the capital adequacy of a bank, has supplemented the above argument that relatively large banks tend to raise less equity capital, and it acts in enhanced performance ROE
Summary
In any economy there are five basic components of financial environment. These are money, financial markets, financial instruments, rules and regulations. Among the various financial institutions, banks are the most active players and fundamental components in the financial system (Dhanabhakyam and Kavitha, 2012). According to Rashid (2010), a bank is a financial institution that receives deposits from the public or depositor and gives loans to the deficit units and the borrowers, in the process gaining from the spread of the different interest charged. Concerning the scope of their advantages, banks are very important to economic growth of any economy. Banks are basic components of the financial system and significant
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