Determinants of banks profitability: a study on commercial banks in Ethiopia

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.