Determinants of Financial Performance of Development of Bank of Ethiopia
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Date
2021-06
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A.A.U
Abstract
Development banks are engines in promoting industrial growth, developing backward areas, encouraging modernization and enhancement of technologies, encouraging export and import substitutions, creating employment opportunities and others. The commercial banks are the most researched sectors whereas development banks are neglected. This study investigated on the potential determinants of firms’ financial performance in the case of development bank of Ethiopia. To this effect, the annual time series data was used for nearly the past three decades, clearly from 1991-2019 and ROA used as a proxy measure of financial performance of the bank. The ARDL-ECM regression analysis technique was employed to find out what factors really determined the financial performance of development bank of Ethiopia in the short-run and long-run relationship. The empirical finding of the study showed that the asset quality, corporate social performance, market loan share, growth rate of real GDP and inflation rate were found to be a significant drivers of the financial performance of development bank of Ethiopia both in the short-run and long-run . Aside this, contrary to the expectations of the study; the leverage, operating efficiency and liquidity were found to have negligible impact on the financial performance of DBE. The profitability of DBE is found to be inversely related to poor asset quality and corporate social performance whereas positively and significantly related to the market loan share, growth rate of real GDP and inflation rate both in the short-run and long-run. In addition, the study revealed that the poor asset quality is found to be the most important factor in determining the financial performance of DBE both in the short-run and long-run among the variables incorporated in the model of the study. Moreover, the result of ECM of the study showed that about 56% of departure in the short-run disequilibrium is corrected each year to reach the long run equilibrium. The findings of this study are of value to DBE’s management, other policy makers and academicians.
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Autoregressive distributed lag-Error correction model, Development banks