Determinants of Financial Performance of Commercial Banks: the Case of Private Commercial Banks in Ethiopia

Abstract

The rapidly growing economy and the effect of the globalization and the development of technology results banks to play an important role. Like any other industry the financial industry have different stakeholders. These stakeholders have different interest which may one way or another affect the performance of commercial banks. Therefore, the study aimed to examine factors determining the financial performance of private commercial banks in Ethiopia. Such factors are classified as the bank-specific, macroeconomic and industry specific determinants over the time period from 2005/2006 to 2013/2014. The bank’s financial performance was measured by banks’ profitability which in turn measured by profitability indicators of return on assets (ROA), return on equity (ROE)and net interest margin(NIM.) The study used a secondary financial data which are analyzed using the multiple regression models. The empirical results show that advertisement activities, Cost of Capital and employee profitability and import are found to be significant factor affecting the performance of Banks measured by ROA at 1% and 5% significant level respectively, but unexpectedly Investment on IT appear to a factor negatively affecting Return on Asset at 10% significant level. The performance of private commercial banks when measured by NIM is positively and significantly affected by branch network and import at a 1% significant level. However, NIM is negatively affected by Investment on IT and export at 5% and 1% significant level respectively. On the other hand, ROE is positively influenced by BRN, Cost of capital,export, import, EP and market share at 5% and 1% significant level respectively. These Results suggested that banks can improve their profitability through the efficient and effective utilization of banks assets on the one hand and by utilizing the external opportunities on the other hand.