Factors Affecting Financial Performance of Ethiopian Commercial Banks

No Thumbnail Available



Journal Title

Journal ISSN

Volume Title


Addis Ababa University


The banking sector plays a crucial role in the economic development of Ethiopia by mobilizing savings, providing credit facilities, facilitating the payment system, promoting foreign exchange transactions, and managing risks. As a result, it is imperative to undertake an analysis of the financial performance of banks with a view to creating and maintaining a healthy, effective, and efficient banking sector. This research project tries to examine the overall trend in the financial performance of Ethiopian commercial banks and the factors affecting their profitability during the period from 2010 to 2021 based on secondary quantitative data collected from the 12 most prominent state-owned and private banks. It also carries out an econometrics analysis to find correlation and causality between the interna bank-specific, sector-specific, and external macroeconomic variables on the one hand and the banks’ profitability on the other hand. Accordingly, the study has revealed that the Ethiopian banking sector has grown in size as measured by the accumulation of assets, improved its asset quality as measured by the improved quality of its loan portfolio, and enhanced its liquidity management. On the other hand, the sector has experienced a deteriorating trend in capital adequacy ratio, management efficiency, earning ability, and overall profitability. Next, the regression estimation result has uncovered that both earning ability and capital adequacy have a statistically significant strong and positive impact on the financial performance of Ethiopian banks. In contrast, the quality of assets, efficiency of management, and liquidity balance have a statistically significant strong and negative impact on the financial performance of banks. Hence, it is concluded that CAMEL variables have a statistically significant strong impact on the performance of Ethiopian banks. Meanwhile, this research does not find enough evidence to determine the impact of bank size, Ethiopia’s real GDP growth rate, and inflation rate on the profitability of commercial banks. Consequently, it is recommended that firstly, with a view to promoting the health and performance of the banking sector, the regulatory body (NBE) should strengthen its vigilance as well as its enabling and supervisory role to nurture a healthier and more profitable banking ecosystem in Ethiopia. Secondly, banks ought to further improve the quality of their loan portfolio by practicing vigorous credit risk management and performing robust credit appraisals. Thirdly, the management of banks should devise mechanisms to enhance cost control, efficient utilization of resources, and diversify their income source to curb the deteriorating trend of management’s efficiency and earning ability and to maximize the profitability of the sector. Lastly, banks should strive to turning over their excess liquid assets into lending and/or investment opportunities with the view of expanding their revenue streams and improving their overall profitability