The Effects of Investment on Financial Performance of Ethiopian Commercial Banks

Abstract

This study investigates the effects of investment activities on the financial performance of Ethiopian commercial banks. The study used 8 public and private Ethiopian commercial banks out of a total of 31 commercial banks during 2006 to 2020. Financial performance is measured by the return on equity while investment is indexed by investments in the National Bank of Ethiopia bill, foreign bank deposit, equity, and fixed assets. The study further controlled firm level variables such as capital adequacy and country-level variables such as inflation and GDP. The fixed effect regression result shows that investments in foreign bank deposit and equity have a strong positive effect on Ethiopian commercial banks’ financial performance. However, investments in National Bank of Ethiopia bill and fixed assets have significant negative effects on Ethiopian commercial banks’ financial performance. The result further reveals that capital adequacy has a significant positive effects and both inflation and GDP have insignificant but positive effect on financial performance of Ethiopian commercial banks. The result implied that investing in bills and fixed assets hinders the current operation of commercial banks thereby hinders their financial performance. Hence, the study finally suggested that Ethiopian commercial banks should invest more in equity and foreign bank deposits to enhance their financial performance than investing in government bills and fixed assets.