The Determinants of Financial Performance of Commercial Banks in Ethiopia
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Date
2018-05
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Addis Ababa University
Abstract
This study attempts to extensively investigate the determinants of financial performance of state owned and private-owned commercial banks in Ethiopia . The author has chosen one of the most popular methods for measuring banking performance, the CAMELS model approach, which is an acronym for the terms, Capital adequacy, Asset quality, Management quality, Earnings ability, Liquidity and Sensitivity to Market risk. The study used quantitative research approach and secondary financial data are analyzed by using multiple linear regression models. Fixed effect regression model was employed on a panel data obtained from audited financial statements of a sample 7 banks, which were selected using judgmental sampling technique, from 2004-2016 to investigate the impact & relationship of internal (bank specific) and external (macroeconomic) factors with bank profitability measure of ROA. The internal factors used in this study include Capital adequacy; Asset Quality, Management Quality, Earning ability & Liquidity Management, whereas the external factors are real GDP and Inflation. Moreover, Based on the regression result, all internal (endogenous) variables except Liquidity affect performance of the bank at 1% and 5% significance level and from external (exogenous) variables Inflation have significant effect on the performance of banks at 5% significance level. However, Real Gross Domestic Product (RGDP) have insignificant effect on financial performance of commercial banks in Ethiopia. Eventually, the study is attentive in its evaluation process pursuing meanigfull analysis that clearly identifies the Ethiopian banking sector strengths and challenges in all financial and managerial areas.
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Keywords
CAMELS Model, Ethiopian Banks, Financial Performance, Profitability