Investigating the Determinants of Commercial Banks Profitability in Ethiopia

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