Determinants of Financial Performance: An Empirical Study on Ethiopian Commercial Banks

Abstract

This study examines the determinants of financial performance of commercial banks in Ethiopia by using panel data of banks over the period 2002-2013. Since the data is secondary in nature, the quantitative approach to research was considered. Besides, the fixed effect model was used. The fixed effect model is preferred to the random effect model based on the hausman specification test. Under this study, both internal and external factors were included. The internal factors used in this study include capital structure; Income Diversification, operating cost and bank size whereas the external factors are effective tax rate, real GDP growth and inflation. Moreover, ROA and NIM were used as the performance measure. Based on the regression result, all bank specific variables except bank size affect performance of the bank significantly but negatively. However, bank size affects performance significantly and positively. In addition to this, macro-economic factors have no significant effect on the performance of banks except the tax rate which negatively but significantly affects ROA.