DETERMINANTS OF FINANCIAL PERFORMANCE OF SELECTED COMMERCIAL BANKS IN ETHIOPIA: THE ROLE OF ICT

Abstract

This study sought to examines the determinants of financial performance of selected commercial banks in Ethiopia the role of ICT using eight Ethiopian commercial banks registered before 2004/05 at NBE, by using panel data of banks over the period 2005-2015. Since the data is secondary in nature, the quantitative approach to research was considered. The study used “descriptive research approach” and secondary financial data are analyzed by using multiple linear regressions (OLS) models for the bank profitability measure, return on asset (ROA) using E-views 9 econometric software. Besides, the random effect model was used. The random effect model is preferred to the fixed effect model based on the hausman specification test. Under this study, both internal and external factors were included. The internal factors used in this study include ICT, operating cost, income diversification, deposit to total assets, whereas the external factors are market concentration, real GDP growth and inflation rate. Moreover, ROA were used as the performance measure. Based on the regression result, internal factors like ICT, operating cost, income diversity are significant key internal drivers of profitability of commercials banks in Ethiopia. Indeed, focusing and reengineering the institutions alongside these indicators could enhance the profitability as well as the performance of the commercial banks in Ethiopia. Among the external factors included in this study market concentration has negative significant effect on profitability of Ethiopian commercial banks. Regarding GDP and inflation it has negative insignificant and positive insignificant effect on performance respectively. From the study result, it is also observed that commercial banks in Ethiopia has low experience of evaluating information technology investments before and after investment is made. In general, the research concluded that banks will have better future with more technological advancements, if they are able to make sound information technology related investments with good management and IT governance system. This is a clear signal to all commercial banks in Ethiopia that they can more concentrate on internal driver without ignoring the industry and macroeconomic indicators when strategizing to improve ROA.