DETERMINANTS OF PROFITABILITY OF COMMERCIAL BANKS IN ETHIOPIA (2010-2014)

Abstract

The financial sector plays an important role in the development of the country. For sustainable economic growth, a country must have a strong banking sector. The Ethiopian banking sector has experienced several challenges over time. The government has implemented several reforms to enhance growth and competition in this sector. To achieve financial stability and growth, it is important to identify the determinants of performance of the banking sector. This paper aimed at investigating the impact of the internal determinants of profitability of commercial banks in Ethiopia over the period 2010-2014. This paper used ordinary least squares method to estimate the impact of bank size, capital, loans, deposits, interest income, non interest income(diversification) and non interest expense(operation expense) on banks profitability. This paper used return on assets (ROA) as a measure of profitability. The findings revealed that bank size, loans, interest income, diversification and noninterest expense do significantly influence profitability of the banks. The result suggests that the management set strategies that encourage commercial banks to raise their assets, non interest income, loan, and interest income as this will enhance the performance of the banks. Another implication of the study is that commercial banks need to invest in technologies and management skills which minimize costs of operations as this will impact positively on their growth and survival.