| Abstract: | The study was carried out to empirically explore the bank specific, industry
specific and macroeconomic determinants of Ethiopian commercial banks’
performance using unbalanced 10 years (2003-2012) annual audited
financial statements of 16 banks and macroeconomic data. It covers 100% of
the population (commercial banks in Ethiopia) which are operating full years
in the study period. The study used three indicators of profitability as
dependent variables: Return on Asset (ROA), Return on Equity (ROE) and
Net Interest Margin (NIM) and ten explanatory variables: Bank Size, Capital
adequacy, Operational efficiency, Liquidity risk, Income Diversification, and
Loan to Deposit Ratio from bank specific factors, Bank Concentration and
Size Bank System from industry specific factors and Real GDP Growth rate
and Annual Inflation Rate from macroeconomic factors. Fixed effect was used
for the ROA model, and Random effect for ROE and NIM models based on
Hausman test.
The empirical result revealed that all bank specific factors except Loan to
Deposit Ratio are statistically significant in determining profitability of
Ethiopian commercial banks. Among them Cost Income Ratio and Liquidity
negatively affect bank performance. There are also significant associations
between Concentration and Size Bank System with profitability. However, no
evidence is found about the relation between macroeconomic factors and
performance of banks. In general, the overall empirical findings provide
evidence that the profitability of Ethiopian commercial banks are mainly
dominated by bank-specific factors which are on the hands of the
management of the banks. So, the study suggests to the banks’ managers and
policy makers to give high concern on the internal factors of profitability and
set direction to manage the most dominant factors of performance. |
