Determinants of Commercial Banks Profitability, an Empirical Study on Private Commercial Banks in Ethiopia
No Thumbnail Available
Date
2021-04
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
A.A.U
Abstract
The main objective of this study is to determine the factors that affect the private commercial banks' profitability in Ethiopia. Based on this general objective, three dependent and nine bank specific and macroeconomic independent variables have been analyzed. In the literature, banks profitability, typically measured by return on asset and return on equity. But, as these two methods not showing the consistency of risk appetite with business structure and strategy of a bank, the researcher considered a new variable of return on risk weighted asset. Hence, the bank profitability is measured by ROA, ROE & RORWA as a function of bank specific and macroeconomic determinants. All private commercial banks operating in the country are considered. Balanced Panel data of 16 commercial banks from 2014 to 2019 was used. Both descriptive and random effect panel econometrics method of data analysis have been employed and the collected data analyzed through Eviews 9 software. Cost of operating income, net interest margin, non-interest income, liquidity, and capital adequacy ratio were found to have significant effect on banks profitability as measured by ROA, ROE and RORWA. Bank size significantly determine profitability measured by AROE and RORWA, whereas, inflation significantly influences profitability measured AROA. Whereas, non-performing loan, bank size and RGDP with AROA; and non-performing loan, Inflation and RGDP with AROE and RORWA, were statistically insignificant effect. The results show that banks' profitability is highly correlated with the banks‟ ability to manage their operating cost and interest margin, diversify their income sources, and strict follow-up on their liquidity and capital adequacy positions. The study indicates that most of the considered independent variables behave similarly with the risk-neutral and risk adjusted performance measurements, except capital adequacy ratio.
Description
Keywords
Profitability, Determinant, Private Commercial Banks