DETERMINANTS OF COMMERCIAL BANKS PROFITABILITY: THE CASE OF PRIVATE COMMERCIAL BANKS IN ETHIOPIA

Abstract

The study was conducted on determinants of commercial banks profitability in the case of Ethiopian private commercial banks. Of total 16 private banks, 8 banks were sampled to represent total population. The study used pure quantitative approach using secondary data from banks and NBE for the period of 2007 to 2014.Also, the paper used linear multiple regression model under the fixed effect estimation. Dependent variable was measured by ROA. The explanatory variables included were bank internal factors (capital adequacy, liquidity, asset quality, operating efficiency, income diversification and bank size), a bank specific factor was market share and external factors included in the study were real GDP and inflation rate. The findings were consistent with Ethiopian and other country’s previous studies. The findings indicated that income diversification, and market share were positively correlated and statistically significant determinants of bank profitability at 1% significance level. In addition, capital adequacy and real GDP were positively correlated with ROA and statistically significant determinants of bank profitability at 5% significance level. On the other hand, operating efficiency was statistically significant and negatively correlated to bank profitability at 1% significance level. Liquidity and inflation were found as insignificant to determine profitability. Even though, non-performing loan that was insignificant at 5% significance level, found as significant at 10% significance level and negatively correlated with profitability. The implication is that banks should take it into account since it is alerting. The study found that income diversification is not only determinants of bank profitability; in addition, it highly impacts profitability followed by real GDP. Finally, the study recommended that banks should consider income diversification, operating efficiency, market share and capital adequacy and also, banks have to focus on real GDP status.