Financial performance of private commercial banks in Ethiopia: by CAMELS approach

Abstract

The purpose of this study was to investigate the effects of CAMELS elements on profitability of nine senior Ethiopian private commercial banks for the periods 2010-2017 and thereby rank the overall financial performance of the respective banks. The financial performance of nine private Ethiopian commercial banks was selected based on the purposive sampling technique. Only the secondary data from audited financial statements of the selected banks were adopted .To accomplish the stated objectives explanatory and descriptive research type were used. The collected data were analyzed by using both descriptive and inferential statistical tools. The descriptive statistics tools were used to rate the overall financial performance of the banks, while panel regression model were used to measure the impacts of CAMELS elements on the bank performance i.e. ROA and ROE. Based on the composite ratings of the individual rankings of the bank LIB, NIB and Wagagen bank listed from first to third. This study runs the redundant fixed effects test using Hausman specification test to choose between random and fixed effect model. Hence based on the result from the regression analysis, OLS model was adopted. Based on the regression result; management efficiency, earnings ability, liquidity management and sensitivity to market risk have a significant influence on the financial performance of Ethiopian private commercial banks measured by return on asset and return on equity. The management of commercial banks should strive to strengthen the above mentioned significant variables. The regulatory organ National bank of Ethiopia should consider the effect of sensitivity to market risk equally as the sixth components of CAMELS elements for the estimation of the bank performance and soundness as also being recommended by IMF and World Bank.