Abstract
This study aims at examining the determinants of the financial performance of private commercial banks in Ethiopia. The study uses secondary data for eight private banks which are in the industry for more than ten years. These banks are chosen from sixteen private commercial banks which are currently functional in Ethiopia banking industry. The data for this study is obtained from annual reports of the banks, minutes and the national bank report. Correlation and multiple linear regressions of panel data for the eight banks for the years 2007 to 2016 is analyzed using random effect model. E-Views 9 software was used for analyzing the data. Return on Asset and Return on Equity are the selected dependent variables while non-performing loan, capital adequacy ratio, bank size, leverage ratio, credit interest income ratio, loan loss provision ratio and operation cost efficiency were the independent variables. Results show that Capital Adequacy Ratio (CAR), Credit Interest Income (CIR) and Size of the bank (SIZE) have positive and statistically significant effect on financial performance. Non-performing Loans (NPLs), Loan Loss Provision (LLP), Leverage Ratio (LR) and Operational Cost Efficiency (OCE) have negative and statistically significant effect on banks’ financial performance. The study suggests that Ethiopian commercial banks are advised to manage their loan loss, be cost efficient, and fix their leverage ratio at maximum level to enhance their profitability. Key words: Ethiopia, commercial banks, determinants, financial performance.
Highlights
Financial institutions play significant role for economic development of nations in general and of developing countries like Ethiopia in particular, where the financial system as a whole is bank dependent due to poor development or even absence of the stock market
The mean value of the second dependent variable, that is, ROE was 21% with the maximum and minimum value of 35 and 1.8%, respectively. This revealed that private commercial banks in Ethiopia were able to generate an average positive return of 21% on their equity for the last 10 years
It can be concluded that size of banks is the determining factor that boosts the financial performance because, it can help them achieve economies of scale
Summary
Financial institutions play significant role for economic development of nations in general and of developing countries like Ethiopia in particular, where the financial system as a whole is bank dependent due to poor development or even absence of the stock market. Banks are one of the deposit taking financial institutions that play pivotal role for financial stability and are engines for economic development of a given nation One of the principal objectives of the financial institutions, particularity the banking sector is mobilizing resources from those who have excess supply especially in the form of saving deposits and channeling these funds to those who are with financial constraints, at the same time with productive investment opportunities
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