Impact of Non-Interest Income Diversification on Financial Performance of Ethiopian Private Commercial Banks
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Date
2025-09
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Addis Ababa University
Abstract
This study explored how non-interest income shapes the financial performance of Ethiopian private commercial banks. It sought to determine whether revenue
diversification plays a meaningful role in their profitability, considering operational efficiency and market dynamics. Using panel data from 2014/15 to 2023/24, a Fixed
Effects (FE) regression model examined the connection between Non-Interest Income Ratio (NIIR), Net Interest Margin (NIM), Cost-to-Income Ratio (CIR), and Herfindahl-
Hirschman Index (HHI) with Return on Assets (ROA) as the profitability indicator. The findings revealed that, non-interest income (β = 0.0034, p > 0.05) had no significant
impact on profitability, indicating strong reliance on the traditional revenue from lending. Net Interest Margin (β = 0.159, p < 0.01) is a key driver of profitability,
emphasizing banks' dependence on interest-based earnings. However, high operational costs (CIR, β = -0.054, p < 0.01) negatively affect financial performance, underscoring the need for cost efficiency improvements. Moreover, market concentration (HHI, β =-0.18, p < 0.01) reduces competition, limiting financial innovation and profitability
growth. The study offers insights for bank executives, policymakers, and financial analysts, highlighting the need for strategic cost management, competitive market
policies, and regulatory adaptation. Future research should explore the long-term effects of capital market expansion and investment banking growth, and cost
optimization strategies on Ethiopian banking profitability, financial stability, and market competitiveness.
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Keywords
Cost Efficiency, Non-Interest Income, Profitability