Abstract:
This study was aimed at investigating the key determinants of commercial banks profitability in
Ethiopia. The factors which determine banks profitability are categorized in to, internal and
external determinants. Variables which were chosen to represent internal determinants were:
liquidity, deposit ratio, asset size, capital adequacy, non performing loan ratio, income
expenditure structure non income , noninterest expense ratio, and the variables which were used
in this study as external determinants include: annual inflation, interest rate and gross domestic
product growth. In addition the study used Return on Asset (ROA) as dependent variable.
The study applied the balanced panel data of eight Ethiopian commercial banks, that covers the
period, 2004 - 2013. The data were analyzed using ordinary least square ( OLS) technique to
investigate the impact on major profitability indicator i.e. return on asset (ROA). Beside this the
study used ten years secondary data which are included in the study have been operating for the
last 10 years excluding 2014, from the year 2004 up to 2013. The findings revealed bank internal
determinants especially loan, affect positivity and significant, deposit, and noninterest expense
influence Negativity and significant bank profitability, and Capital, Liquidity, NPL, Non interest
income are positively affected bank profitability but not statistically significant. External
determinants ( real annual gross domestic product growth, and real interest rate,) are
significantly and positively affect bank profitability. Inflation rate doesn't influence the
performance of Ethiopian commercial banks since, their relationship with bank performance was
not statistical significant. Thus, management bodies of that commercial banks should focus on
increasing public awareness to mobilize more saving deposits and this will enhance their
performance in provision of loans to customers.
