Financial Performance of Banking in Ethiopia: a Comparative Study of Interest-Free Banking and Conventional Banking
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Date
2025-01-18
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Publisher
A.A.U
Abstract
The main objective of the research was to analyze and compare the financial performance of
conventional and interest-free banking systems in Ethiopia, focusing on key financial ratios. The
study adopts a quantitative research methodology, using secondary data from the financial
statements of selected banks over a period of three years (2021-2023). Key financial ratios such
as profitability, liquidity, risk and solvency, leverage, and efficiency ratios are analyzed to
evaluate the financial health and performance of the two banking systems. The findings of the
study reveal that the majority of the differences in financial ratios between the two banking
models were not statistically significant. However, Interest-free banks while more stable, faced
higher operational costs relative to their income. The comparative analysis highlights relative
strengths and weaknesses of each banking system, with conventional banks demonstrating
greater resilience to economic shocks and interest-free banks showing higher efficiency in using
assets and equity to generate profits. The study recommends that conventional banks focus on
technological innovation and enhanced risk management practices to maintain competitiveness.
Interest-free banks are suggested to optimize their debt management and improve cost
efficiencies to ensure long-term sustainability. Additionally, the study suggests further research
into the impact of regulatory frameworks on the performance of both banking systems and their
role in promoting financial inclusion. This research contributes to the understanding of financial
performance in Ethiopian banking and provides valuable insights for both policymakers and
banking institutions looking to enhance the effectiveness and stability of their operations
Key Words Interest-Free Banking, Conventional Banking, Financial Performance, Comparative
Analysis, Financial Ratios