Factors Affecting Banks Profitability: An Empirical Study on Ethiopian Private Commercial Banks
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Date
2014-01
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Addis Ababa University
Abstract
This study examined factors affecting profitability of private commercial banks’ in
Ethiopia. The study adopted quantitative research approach and the statistical cost
accounting model was used to estimate the profitability, which was measured by return
on asset as a function of balance sheet, industry specific and macroeconomic explanatory
variables. The finding of the study show that loan and advance, current deposit, other
liabilities and gross domestic product have statistically significant and positive
relationship with banks’ profitability. On the other hand, variables like fixed deposit,
market concentration have a negative and statistically significant relationship with
banks’ profitability. However, the relationship of deposit with other banks, sum of
investment, saving deposit and inflation is found to be statistically insignificant. As a
result, the study recommended that private commercial banks should focus on increasing
public awareness to mobilize more savings this will enhance their performance in
provision of loans and advance to customers. Finally, private commercial banks should
not only be concerned about internal structures and policies, but they must consider both
the internal environment and the macroeconomic environment together in fashioning out
strategies to improve their profitability.
Key words: Asset Liability Management, Statistical Cost Accounting Model, Profitability
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Keywords
Asset liability management, Statistical cost accounting model, Profitability