Asset Liability Management and Commercial Banks Profitability in Ethiopia

Abstract

This study examined the effect of ALM on commercial banks profitability in the Ethiopian financial market. The SCA model was used to estimate the profitability which is measured by ROA as a function of balance sheet and macroeconomic explanatory variables. For this purpose eight commercial banks over the time period from 2005 to 2010 were selected. The model hypothesize that the rate of return on earning assets is positive and varies across assets, and the rate of cost on liabilities is negative and varies across liabilities. The pooled OLS regression analysis result showed that all assets, except fixed assets, mainly loans and advances affect profitability positively, while all liabilities mainly saving and fixed deposits and other liabilities and credit balances have significant and negative effect on commercial banks profitability. With regard to macroeconomic variables, real growth rate in GDP has negative effect on commercial banks profitability. As a result, the study recommended that commercial banks should focus on increasing public awareness to mobilize more saving and fixed deposits and this will enhance their performance in provision of loans and advance to customers.

Key Words: Commercial banks, Statistical Cost Accounting Model, Asset Liability Management,    Profitability