Abstract
The study was attempted to investigate determinants of financial performance of commercial banks in Ethiopian by using secondary data. The data were obtained from audited financial statements of five sampled commercial banks for the period of 1997 to 2017 and National Bank of Ethiopia. The study used return on assets (ROA) and return on equity (ROE) as dependent financial performance variable. Moreover, the study used bank specific variables as explanatory variables. Both descriptive statistics and econometrics model specifically fixed effects estimation were used to analyze the relationships of dependent variable with explanatory variables. The major findings of the study shows that bank specific determinants were very important in explaining financial performance of commercial banks. The management efficiency, customer deposit to total asset ratio, capital adequacy ratio, loan to deposit ratio were positively and significantly related to bank’s financial performance. The study recommends that banks put a lot of focus on their own internal processes since bank specific factors have the biggest impact on their profitability. Most importantly, Ethiopian commercial banks should invest in expand in new geographical area and also upscale their innovation leading to products attractive to consumers. Competition, which is the main industry specific factor affecting profitability, should be handled through well designed marketing strategy.
Highlights
Commercial banks play an important role in the development of a country
This study was conducted to examine the determinant of internal factor of commercial banks in Ethiopian context to contribute its own effort for the evidence
Loan to deposit ratio have negative relationship with return on assets (ROA). This means as loan to deposit variables become increased the financial performances of the commercial banks become poor
Summary
Commercial banks play an important role in the development of a country. As an important segment of the tertiary sector of an economy, commercial banks act as the backbone of economic growth and prosperity by acting as a catalyst in the process of development. They inculcate the habit of saving and mobilize funds from numerous small households and business firms spread over a wide geographical area. Banking system as one part of financial institution plays an important role in economic growth and development of a country. Efficient banking system reflects a sound intermediation process and enhances the banks’ sustainability. Efficient functioning of commercial banks’ is a best indicator of effective monetary and polices (Aikaeli, 2008; Andries, 2010)
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