Macroeconomic determinants of commercial Banks’ profitability in Ethiopia

Abstract

This study determines the effect of macroeconomic factors on profitability of commercial banks in Ethiopia. The Profitability measure of commercial banks used was the Return on Asset (ROA) which was regressed against the macroeconomic variables including GDP growth rate, the exchange rate (US dollar), Inflation (CPI), financial deepening and average Lending Rate of the commercial banks. The period of the study was fifteen years from 2002 to June 2016. The study employed annual secondary data which was obtained from the national bank of Ethiopia. Ministry of Finance and Economic Cooperation and annual audited financial statements from commercial banks selected in the sample. Data was analyzed using Pooled Least Square Method which assumes linearity between the dependent variable and the independent variables and the analysis technique was multiple regressions aided by research software 'eviews' version 8. The profitability of commercial banks as measured by ROA was found to be positively related with GDP growth rate, lending interest rate of average commercial banks, inflation, financial deepening (M2/GDP) and with exchange rate. But the finding show insignificant relationship between exchange rate and commercial banks profitability. The study suggests that focusing and giving more attention for macroeconomic factors could enhance the profitability as well as the performance of the commercial banks in Ethiopia.