Determinants of the Profitability of Private Commercial Banks in Ethiopia

Abstract

The aim of this study is to examine factors that determine profitability of private commercial banks in Ethiopia. Because the factors that determine bank profitability are broad, the nine variables that were identified from the literature and considered to have an impact on profitability are categorized into three major environmental aspects: macroeconomic variables, industry-specific variables, and bank-specific variables. To verify the independent variables that behave differently with risk adjusted return, risk neutral and risk adjusted performance metrics were also used. In terms of sample, the study looked at balanced panel data of 16 commercial banks from 2014 to 2019. In order to analyze the data, both descriptive and inferential statistics were used. From the total nine independent variables, two of them namely, the bank capital strength and managerial efficiency simultaneously determine banks' profitability measured both in Return on Assets (ROA) and Return on Risk Weighted Assets (RORWA). Whereas, three variables, namely, income diversification, banking industry development and inflation rate had significantly determined banks' profitability measured in ROA. While credit risk had significantly determined banks' profitability measured in RORWA. The remaining three variables, namely: bank size, bank growth and gross domestic product of country do not significantly determine banks profitability measured either on ROA or RORWA. The study suggests commercial banks to enhance capacity to control their operating costs and interest margin, diversify their sources of income, and strict follow-up on their capital adequacy positions.

Keywords: Commercial Banks, Profitability

DOI: 10.7176/RJFA/14-7-03

Publication date: April 30^th 2023