Measuring the Relationship between Profitability and Asset Liability Management in Ethiopian Commercial Banks: A Ratio Approach

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Date

2012-02

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Publisher

A.A.U

Abstract

This study is designed to analyze the relationship between the balance sheet components and profitabilit1j of Ethiopian Commercial Banks for the period 2001 to 2010. In order to carry out the study, balanced panel data comprising a sample of 80 observations from the balance sheets and the profit and loss accounts of 8 Commercial Banks were gathered. Two of them are public while the rest are private Banks. The relationship between profitabilit1j and Asset Liabilit1j Management (ALM) was tested using the Statistical Cost Accounting (SCA) model. Two measures of profitabilit1j were used to signify the relationship between profitabilit1j and ALM. Those are Total Income and Net Income. The results of the analysis showed that public Banks balance sheet components of Loans and Advances, Saving Deposits, and external factors -GOP growth rate and Market concentration significantly affect their total income, while net income of public Banks is significantly affected by Balance Sheet Unrelated Items, Loans and Advances, Saving Deposits, Inflation ,GDP growth rate and Market concentration. Private Banks' total income is found to be significantly affected by Balance Sheet Unrelated Items, Placings with other banks, Sum of Investments, Fixed Deposits and Other Liabilities, and their net income is impacted by Off-Balance Sheet Items, Saving Deposits, Fixed (Time Deposits, Other Liabilities and external factors. Consequently, Bank managers are advised to pay attention to these items in their profit planning in order to enhance their performance.

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Keywords

ALM; SCA; Commercial Banks

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