Factors Affecting the Performance of Commercial Banks (A Case Study on Commercial Banks in Ethiopia): CAMEL Ratings

Abstract

This study tried to assess factors affecting the efficiency and performance of Ethiopian commercial banks. Nine years audited financial data (i.e.2010-2018) was used to analyze the effect of explanatory variables on the explained variables using explanatory research design with quantitative research approach. Banks play a great role in the development of the countries. They act as financial intermediaries between the parties with lack of capital and parties with surplus capital. In order to perform their functions first their financial healthiness should be improved. In this study performance of the banks was measured by ROA and efficiency of the banks by efficiency ratio. On the other hand, factors that could be affect the performance of the banks were capital adequacy, assets quality, management capacity, earning quality, liquidity position, GDP and age of banks were used using different measurement mechanisms. Random effect GLS regression result indicated that management capability, assets quality and earning quality significantly affect the performance of the banks measured by ROA. On the hand, assets quality, earning quality, liquidity and age of the banks has significant effect on the efficiency of the banks. Capital adequacy, GDP and age of the banks have no impact on the ROA, and capital adequacy, management capacity and GDP do not have significant effect on the performance of the banks measured by efficiency ratio. According to the finding, management capability and earning quality have positive effect on the performance of the banks. Keywords: CAMEL, ROA, Performance of the banks, Efficiency ratio and commercial banks DOI: 10.7176/RJFA/11-5-01 Publication date: March 31 st 2020