Investigating the Determinants of Commercial Banks Profitability in Ethiopia

Alem Gebremedhin Berhe

doi:10.7176/ejbm/11-1-05

Abstract

This study is conducted aiming at investigating the determinants of commercial banks profitability in Ethiopia on the bases of secondary data obtained from nine sample commercial banks over the period of 2007 to 2016 using CAMEL model. While the profitability of commercial banks is influenced by internal and external factors, this study focuses only to examine the effect of internal factors on the profitability of Ethiopian commercial banks. For this purpose, ordinary least square technique (OLS) is utilized in this study to estimate the influence of Capital adequacy, Asset quality, Management Efficiency, Earning ability, and Liquidity proxied by Total Capital to Total Assets, Non-performing Loan to Total Loan, Total Loan to Total Deposit, Interest Income to Total Assets, and Liquid Asset to Total Assets ratios respectively on Earning per Share (profitability indicator of the commercial banks). Moreover, the results of this study are dealt with descriptive statistics, Pearson correlation, and Regression Analysis. Further, SPSS version 20 is employed to analyze and present the data. The empirical results seemed to comprehend that while total capital to total asset and total loan to total deposit ratios have a positive correlation with the dependent variable (EPS), interest income to total asset, non-performing loan to total loan, and liquid asset to total assets ratios are negatively associated with the dependent variable. Moreover, the findings of the study indicated that only total capital to total asset and liquid asset to total assets ratios have significant impact on the profitability of commercial banks in Ethiopia. Keywords: Determinants; profitability; commercial banks; CAMEL model; Ethiopia DOI : 10.7176/EJBM/11-1-05

Highlights

The financial system of any economy includes the following five components: money, financial instruments, financial institutions, rules and regulations and financial markets
As already described, this study tries to analyze the effect of bank specific variables on the profitability of commercial banks in Ethiopia using CAMEL model
5.1 Conclusion In this paper, the effect of bank specific factors on bank’s profitability was analyzed using CAMEL model: considering Capital Adequacy, Asset quality, Management efficiency, Earnings ability, & Liquidity status were considered as independent variables while earning per share as the dependent variable

Summary

Introduction

The financial system of any economy includes the following five components: money, financial instruments, financial institutions, rules and regulations and financial markets. The Ethiopian financial sector comprises commercial banks, insurance companies, development banks, and micro finance institutions. In Ethiopia, there were no privet banks until 1991; the down fall of the socialist regime. The whole banking system was nationalized so it seemed difficult to meet the objectives of commercial banks. With the overthrow of the socialist regime, i.e., at the end of 1991, the economic system of the country was changed from socialism to free market economy. There become substantial changes in the government policy regarding to the ownership of and concentration in the banking industry; the banking sector was privatized. Today there are 16 private and 1 public commercial banks in the country (NBE, 2016/17)

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Conclusion