DETERMINANTS OF PROFITABLITY IN ETHIOPIAN COMMERCIAL BANKS: THE CASE OF PRIVATE COMMERCIAL BANKS (2001-2013)

Abstract

The purpose of this study is to investigate determinants of private commercial banks profitability in Ethiopia by using panel data of six private commercial banks from year 2001 to 2013. The previous research that has been conducted in Ethiopia by researchers on the determinant of private bank profitability is not well studied and is not covered all the determinate factors. Hence, this study aims to fill this gap. In view of this fact, the significance of this study is providing valuable information to bank managers in order to enhance their bank profitability and it enables them to give a due emphasis on the identified variables. The study used multiple linear regressions models to investigate factors that determine the profitability of commercial banks .To obtain information relevant to the study, secondary data was used. Besides, in the study all operational commercial banks in Ethiopia were taken as study population and purposive sampling method was used to select sample from this population. The findings of the study show that capital adequacy, loan production, deposit fund, income diversification, managerial efficiency and size of the bank have statistically significant and positive relationship with banks’ profitability. On the other hand, variables like asset quality and number of branch have a negative and statistically significant relationship with banks’ profitability. However, the relationship for bank liquidity and administration cost is found to be statistically insignificant. Therefore, it is recommended that private commercial banks should increase their level of asset, improve their asset quality ,diversify their non interest income sources, provide trainings to employees and managers, diversify their non interest income sources and mobilize more deposits in order to be profitable.