Determinants of Bank Profitability in Selected Private Commercial Banks of Ethiopia
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Date
2024-01-06
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A.A.U.
Abstract
The banking industry plays a major role in the development of a country. For financial
institutions profitability is a major objective. The performance of banks as compared to other
banks in the industry is a crucial information for the bank itself, regulatory bodies such as
National bank of Ethiopia, and other stakeholders. This study assessed the determinants of
profitability for private commercial banks in Ethiopia using panel data of sixteen commercial
banks covering a period of five years (2018-2022). Quantitative approach was applied since all
the data used for the study was of secondary type. The target population for the study was the
private commercial banks in Ethiopia yet a sample of sixteen banks were taken to implement
the study using nonprobability purposive sampling method. Explanatory research design was
used to explain the relationship the dependent variable has with the explanatory variables.
Fixed effect model was applied to conduct a multiple regression analysis on the balanced panel
data sets. The explanatory variables used in the study comprised of both internal and external
factors which include revenue diversification, loan to deposit ratio, expense management,
capital adequacy, bank size, nonperforming loan ratio, market share, inflation and GDP while
the dependent variable chosen to measure profitability was the return on asset. The findings of
the study indicate that revenue diversification, capital adequacy, and market share are
statistically significant variables that have a positive effect on return on asset while expense
management and nonperforming loan ratios have a negative but significant impact on
profitability. On the other hand, loan to deposit ratio, size, inflation and GDP were statistically
insignificant variables based on the results of the study