Determinant of bank profitability: evidence from banking industry in Ethiopia

Abstract

The instability of banking industry can cause the collapse of the whole economy in the given country. The method that used to test sustainability of banking sector is profitability. Profitability is the major determinant factors for stability and lending capacity of banking business in order to improve economic growth of the stated country. So, the purpose of the study was to investigate the impact of bank specific and macroeconomic determinant of banking industry in Ethiopia. To achieve this objective a secondary source of balanced panel data of 9 Commercial bank in Ethiopia that covers the period from 2008-2017 were used. Quantitative approach of research design was applied to fulfill the objective of the study. The paper uses OLS regression model, in order to investigate the impact of capital adequacy, liquidity risk, credit risk, bank size, fee and commission income, revenue diversification, cost income ratio, real GDP growth rate and political stability index as independent variable on major profitability indicator which is return on asset (ROA). The major outcomes of the study shows capital adequacy, bank size, fee and commission income, revenue diversification (other income over total income) and liquidity risk (loan to deposit ratio) have statistically significant positive relationship with bank’s profitability. On the other hand, political stability index has positive impact on bank profitability, but statistically insignificant. Further, the results from the panel regression suggest that, credit risk (loan loss provisions to total loan) and cost income ratio have statistically significant negative impact on bank profitability. However, real GDP growth rate has insignificant negative impact on ROA. Finally bank managements were recommended to improve their capital base, efficiently manage their operating cost, expand fee service income, mobilize more deposit, expand bank branch should not put all eggs in one basket and improve their credit risk management.