A Study on the Performance of Commercial Banks in Ethiopia

Abstract

This study examines the impact of financial risks on the profitability of commercial banks for a total of eight commercial banks in Ethiopia, covering the period of 2000-2011. To this end, the study adopts a mixed methods research approach by combining documentary analysis and in-depth interviews. The study reviews the financial records of eight commercial banks in Ethiopia and relevant data on macroeconomic factors considered. The findings of the study show that Credit risk and liquidity risk have a negative and statistically significant relationship with banks’ profitability. However, the relationship for interest rate risk and foreign exchange rate risk is found to be statistically insignificant. Bank size, capital strength and GDP growth were found to be the major factors determining the volatility of profit in Ethiopian commercial banks. The coefficient estimates of the above mentioned controlled variables were positive and statistically significant at 1% significance level. The study suggests that focusing in credit risk management and   keeping optimal level of liquidity which enables banks to meet their contractual commitments could maximize return on assets Ethiopian commercial banks.

Keywords: commercial banks, profitability, financial risks

DOI: 10.7176/RJFA/11-13-04

Publication date:July 31^st 2020