The Impact of Liquidity and Solvency on Profitability in Ethiopian's Private Banks
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Date
2023-12-28
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Publisher
AAU
Abstract
This study aims to address the challenges associated with evaluating profitability in the Ethiopian
banking industry, the evaluation of profitability within the Ethiopian banking industry faces
challenges associated with the reliance on high annual gross profit as a comparative benchmark.
This research addresses this issue by investigating and contrasting the influence of liquidity and
solvency on the profitability of Ethiopian private banks. The primary objective is to establish an
industry benchmark through a thorough desk review, evaluating the annual reports of Ethiopian
private banks using liquidity, profitability, and solvency ratios. Adopting a case study research
methodology, the study selects 16 private banks registered under the National Bank of Ethiopia
based on the accessibility of their accounting statements. The analysis focuses on return on assets
(ROA) as the dependent variable and considers current ratio, debt ratio, interest coverage ratio,
and total debt to equity ratio as independent variables. The study employs correlation coefficient
analysis and ANOVA F-test within the framework of multiple regression analysis to reveal
statistically and practically significant findings. Notably, the research identifies a positive
correlation between the current ratio and ROA, emphasizing the importance of liquidity in driving
profitability among the sampled banks. Conversely, the study highlights a negative relationship
between the debt ratio, interest coverage ratio, and ROA, underscoring the adverse impact of high
debt and low interest coverage on profitability within the Ethiopian private banking sector. In
conclusion, these findings underscore the critical significance of considering liquidity and
solvency factors in the evaluation of profitability within the Ethiopian banking industry, providing
valuable insights for stakeholders and policymakers