Factor Affecting Profitability of Commercial Banks in Ethiopia
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Date
2025-09
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Addis Ababa University
Abstract
The aim of this research was to determine the elements influencing Ethiopian commercials banks' profitability. Used a purposive judgmental sampling method, banks that produced at least 15-year
financial reports were included in the sample. Hence, 14 banks were chosen from a total of 31commercial banks to achieve this goal. The data was collected over a 15-year period (2010–2024),
totaling 210 data points. The study examined eight explanatory variables: Banks Size (BSZ), Capitals Adequacy Ratios (CAR), Management Efficiency Ratios (MER), Diversification of
Revenue Streams (DRS), Non-Performing Loans (NPL), Market Share (MKS), and Inflation Rate (INF). The dependent variable was profitability, as determined by Return on Assets (ROA). Both
explanatory and descriptive research designs were used in this study; the former sought to explain the association between the independent and dependent variables that were selected, while the
latter gave a thorough description of the phenomenon being examined without necessarily pointingto its causes. Regression study revealed that NPL and INF had a substantial negative association
with ROA, but BSZ, CAR, MER, MKS, and GDP showed a considerably positive link. Nevertheless,there is no noticeable connection between DRS and ROA. According to the results, Ethiopian
commercial banks can increase their profitability by growing in size, improving their capital adequacy ratio (by adding more capital and improving their assets quality), increasing
management effectiveness, increasing their market share (particularly in loans), controlling theirnon-performing loan ratio (NPL) for better asset quality, and adjusting their operations and
strategies to the GDP and adjusting lending rate in accordance with inflation rate of the country.
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Keywords
Return on assets, Capitals adequacy, Bank Size, management efficiency Non- Performing Loan, Market Share, Gross domestic product and inflation