Effect of income diversification on bank performance: In case of commercial banks in Ethiopia

Abstract

This thesis investigates the relationship between income diversification and bank performances evidence from Ethiopian commercial banks. The study used 17 banks (16 privates and 1 public) from 2014 to 2018 year. The thesis employed pooled OLS model, Fixed Effect model, differenced fixed effect and Random Effect model. The panel data was presented by using descriptive statistics. The proxy (dependent variable) used to estimate performances was return on assets (ROA). The researcher used income diversification (non-interest income) as independent variables. The econometric evidence showed positive and significant association between diversification (non-interest income) and bank performance. This in part justifies policy actions that promote diversification. The coefficient for exchange rate and inflation rate have shown positive and significant association with bank performance. Furthermore, the coefficient for bank equity have shown positive and significant association with bank performance. From a policy point of view the finding suggests that bank regulations which might tend to increase the level of income diversification (non-interest income) should be evaluated carefully.