The Effect of Corporate Governance on Financial Performance of Ethiopian Private Commercial Banks

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Corporate governance has become one of the important issues of businesses around the world and it is attracting attention now a days. The issue of corporate governance, however, has long been ignored in developing economies like Ethiopia. To fill the gap, this study examines the impact of corporate governance mechanisms on the performance of Ethiopian private commercial using a structured review of documents and financial data of the sampled private commercial banks for the period covering from the year 2009 to 2018. The study assessed the relationship between selected internal corporate governance mechanisms and bank performance as measured by return on asset (ROA). Both descriptive and regression analyses were conducted on the selected samples of 10 private commercial banks out of 16 private banks operating in the Ethiopia. Results from the regression analysis estimated by fixed effect regression model showed that availability of various board subcommittees, gender diversity in the board, and frequency of board meeting, had a significant effect on the financial performance in Ethiopian banking sector. There is negative and statistically insignificant association between board size and return on asset (ROA). This shows that small boards are more effective in monitoring and controlling private commercial banks management and it helps to reduce agency costs. Bank size (the control Variable) shows a negative and significant impact in its relationship with the banks' financial performance. This implies that bank size was able to explain the rising bank profit but had a negative sign. Estimation result suggests that larger banks in terms of total asset tend to have lower ROA. This finding is consistent with theories emphasizing the importance of scale effects for financial performance. In general, the findings suggest that banks with effective corporate governance mechanisms improve financial performance depending on the financial performance measure being used. Keywords: Corporate Governance, bank performance, private commercial banks



Bank Performance,, Corporate Governance