Factors Affecting Profitability: An Empirical Study on Ethiopian Banking Industry
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Date
2012-06
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A.A.U
Abstract
This study examines the bank-specific, industry-specific and macro-economic factors
affecting bank profitability for a total of eight commercial banks in Ethiopia, covering the
period of 2000-2011. To this end, the study adopts a mixed methods research approach
by combining documentary analysis and in-depth interviews. The findings of the study
show that capital strength, income diversification, bank size and gross domestic product
have statistically significant and positive relationship with banks ' profitability. On the
other hand, variables like operational efficiency and asset quality have a negative and
statistically significant relationship with banks ' profitability. However, the relationship
for liquidity risk, concentration and inflation 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. Moreover, banks in Ethiopia should not only be concerned about
internal structures and policies, but they must consider both the internal environment and
the macroeconomic environment together in fashioning out strategies to improve their
performance or profits. Finally, the government needs to revisit its requirements imposed
solely on private banks like investing 27% of their total loans on bonds at a relatively
lower interest rate.
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Keywords
Factors affecting Profitability, Ethiopian Banking Industry