DETERMINANTS OF PROFITABILITY (ROA) THE CASE OF DEVELOPMENT BANK OF ETHIOPIA

Abstract

The objective of this study is to investigate the determinants of Return on Asset (ROA) of Development Bank of Ethiopia which are, nonperforming loans, Bank size, Loan size, Operating expense and inflation The study focused on the determinants of Return On Assets of Development Bank of Ethiopia, against the background that there was large amount of nonperforming loans beyond the set threshold of NBE, which could affect the overall status of the bank and the country as a whole. Based on the general objective of assessing the profitability of Development Bank of Ethiopia, this study also tries to investigate the reasons for the accumulation of bad loan at DBE. In the empirical analysis, NPLs are negatively associated with Return On Asset of the bank and affect liquidity of the Bank. In contrary operating expense is positively related to Return On Asset (ROA), this is because as the operation or the activity of the bank increases the operating expense also increases. Using the ordinary least squares estimation technique, this paper analyzes the profitability of the the bank over the period from 1999/2000 – 2017/2018. Our profitability determinants include bank-specific characteristic as well as macroeconomic factors inflation. Consistent with previous studies, we find that the bank-specific determinants, with the exception of size, are significantly affect profitability of the bank. For size measure, the impact is uncertain and is depended on the category of bank size.