Factors Determining Profitability of Commercial Banks in Ethiopia
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Date
2025-01-21
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A.A.U
Abstract
The aim of this study is to investigate the key determinants which influence commercial banks’ profitability in Ethiopia. The factors which determine banks’ profitability categorized into two: internal and external determinants. The variables chosen to represent internal determinants for this study are: deposit, liquidity, capital adequacy, credit risk, management efficiency. While the external determinants are: market concentration, economic growth, inflation, government regulation. The study is conducted based on secondary data sourced from National Bank of Ethiopia and their audited financial report comprising the financial statement and other performance reports for the last fourteen years (2010-2023). For the purpose of this study one government and eight private commercial banks are considered.The analysis of the data has been done and pooled OLS regression model is selected based on model specification result as an appropriate approach for the analysis. To this end, the model is used to estimate the relationship between banks’ profitability using internal and external factors.The regression analysis showed that the relationship between various factors and Return on Assets (ROA) explained 82% of the variation in ROA. Key findings revealed that deposits (DOP), liquidity (LIQ) and capital adequacy (CAD) had a positive significant effect on ROA. Conversely, credit risk (CRR), market concentration (HHI) and Management Inefficiency (MIN) had a significant negative influence on ROA, highlighting the importance of effective management. Economic factors like GDP and inflation showed insignificant impacts, and regulatory factors such as mandatory bond security purchase were positively associated but lacked statistical significance. Based on the findings of the study, the bank management should strive to: utilize cost effective means of operation, raise the deposit level diversify their investment so as to maximize their profitability.