The Nexus between Banks Soundness and Performance: Evidence from Selected Commercial Banks in Ethiopia
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Date
2025-06-02
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AAU
Abstract
The stability and performance of commercial banks are vital for Ethiopia’s economic development, particularly in a volatile financial landscape. This study explores the relationship between bank soundness and financial performance within Ethiopia’s commercial banking sector, analyzing 16 banks from 2015 to 2024. Using the CAMEL framework Capital Adequacy, Asset Quality, Management Efficiency, Earnings, and Liquidity; it evaluates their impact on key profitability metrics: Return on Assets, Return on Equity, and Net Interest Margin. The analysis incorporates institutional factors such as bank age, ownership structure, and bank size, alongside macroeconomic variables like real GDP growth, to ensure a comprehensive assessment. A quantitative panel data approach with a Random Effects model is employed, addressing econometric challenges through diagnostic tests to ensure robustness. The findings highlight a significant relationship between soundness indicators and financial performance metrics, revealing that operational efficiency and scale are critical drivers of profitability. Larger banks show stronger interest margins, underscoring the benefits of scale in Ethiopia’s banking landscape. While Capital Adequacy exhibits a generally positive but inconsistent influence on performance, liquidity supports interest income generation. Macroeconomic factors and ownership structure show limited impact, emphasizing the role of internal factors in navigating Ethiopia’s economic environment. These insights provide valuable guidance for policymakers and bank management.
Keywords: Bank Soundness, CAMEL Framework, Random Effects Model, Ethiopian Commercial