Determinants of Commercial Banks Profitability: The Case of Ethiopian Commercial Banks

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Addis Ababa University


Banks are the most crucial financial intermediaries in the economy and economy that have profitable banking industry are better able to withstand negative shock and contribute to the stability of the whole economy. The purpose of this study is to investigate determinants of commercial banks profitability in Ethiopia by using panel data of eight commercial banks from year 2002 to 2013. The study used mixed research approach and secondary financial data are analyzed by using multiple linear regressions models for the bank profitability measure, Return on Asset (ROA). Fixed effect regression model was applied to investigate the impact of bank size, capital adequacy, liquidity risk, operating efficiency, management efficiency, employee efficiency, funding cost, banking sector development, real GDP, inflation rate and foreign exchange rate on Return on Asset (ROA) and also primary data was used to support the result of the documentary analyses. The findings of the study show that bank size, capital adequacy and gross domestic product have statistically significant and positive relationship with bank’s profitability. On the other hand, variables like liquidity risk, operational efficiency, funding cost and banking sector development have a negative and statistically significant relationship with banks’ profitability. However, the relationship for Management efficiency, employee efficiency, Inflation and foreign exchange rate is found to be statistically insignificant. The study suggests that focusing and reengineering the banks alongside the key internal drivers could enhance the profitability as well as the performance of the commercial banks in Ethiopia. Key words: profitability, commercial bank



profitability, Commercial banks