DETERMINANTS OF COMMERCIAL BANKS’ PERFORMANCE IN ETHIOPIA

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.