FACTORS IMPACTING PROFITABILITY OF PRIVATE COMMERCIAL BANKS IN ETHIOPIA

Abstract

Factors Impacting Profitability of Private Commercial Banks in Ethiopia Tulu Deressa Indira Gandhi National Open University, 2016 Banking sector is the backbone of any economy and plays an important role in the economic development of a country. Mobilization of the national savings to the productive sectors is possible only with the help of commercial banks that augments the economic growth rate of a country. This study investigates the effect of bank specific and macroeconomic factors on banks’ profitability on profitability of private commercial banks in Ethiopia. The determinants of banks’ profitability used in this study were bank size, capital adequacy, assets quality, expenses management and liquidity management as bank specific factors and NBE Bill, GDP, Inflation rate and real interest rate as macroeconomic factors. The econometric model of fixed effects regression method was used in this study, using a panel data of 6 banks in Ethiopia for period from 2006 to 2015. Overall, results of this study show that, the profitability of the private commercial banks under study is mostly affected by bank specific factors (that are internal factors determined by bank’s management decisions and policy objectives). Yet, macroeconomic factors with the exception of NBE Bill do not seem to significantly affect profitability. These results have important implications for banks’ survival and growth. It is expected that this study will guide the policy makers and bank management in the formulation and implementation of better policies and strategies which may results better performance of banks in Ethiopia.