Assessment of Financial Distress Condition of Commercial Banks in Ethiopia: Assessment of Trends using Altman’s Z-score Model

Abstract

Financial distress is a global business challenge for a long period of time. The study on financial distress has become more relevant and important because even large firms are failing under unforeseen circumstances causing economic and social problems and early warning signal is the only detective mechanism. Many companies have gone into bankruptcy despite their high profit and some are still prone to financial distress problems. The main objective of this study was to assess the financial distress condition of CBE using Altman’s Z’’-score model.  The study used a descriptive research design with a quantitative model-based approach. The study covers a period of 5 years (2017-2021).  Altman’s Revised Z’’-score model (formula) was used to estimate the financial distress condition of the bank. The study used a quantitative secondary data collected from audited financial statements (balance sheet and income statement) of top-6 profitable private banks (in 2020/2021). The main cause of financial distress was liquidity position. In addition to this, it is also found that commercial banks have comparatively similar financial distress status in current financial condition. However, CBE’s long term financial soundness index is lower than other banks.  It is therefore recommended that top managers with board of directors should enhance the dividend policy and practice of the bank.

Keyterms:Financial Distress, Altman’s Z-score, Commercial bank of Ethiopia, Liquidity, and Retained earnings.

DOI: 10.7176/RJFA/13-19-01

Publication date:October 31^st 2022