Determinants of Commercial Banks Profitability: The case of Some Selected Commercial Banks

Abstract

The study was attempted to investigate determinants of bank profitability The Case of Some Selected Commercial Banks by using secondary data and the primary sources. primary data is collected by semi structured interview and open- ended questioner from the chief financial officer about each sampled commercial banks. Moreover, Secondary data were obtained from audited financial statements of five sampled commercial banks (Commercial Bank of Ethiopia, Awash International Bank, Bank of Abyssinia, Cooperative Bank of Oromia and Oromia International Bank) for the period of 2003 to 2012. The empirical investigation uses the accounting measure Return on Assets (ROA) to represent Banks’ performance. The study finds that bank specific variables by large explain the variation in profitability. 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. By using OLS estimation method to measure the effects of internal and external determinants on profitability in terms of return on asset. The estimation results show that profitability persists in some extent, implies that the indicator of the existence of bank-specific determinants, macroeconomic determinants. Regarding the explanatory variables, all bank-specific determinants, with the exception of capital adequacy, money supply, gross domestic product, and income affect bank profitability significantly and positively in the anticipated way. However, Operating Efficiency affects the commercial banks profitability significantly and negatively. Finally, from macroeconomic determinants Money supply has positive and significant effect on asset return of the bank. The commercial banks policy makers and managers should give high Concern to the inflation rate, money supply, liquidity, income and operational efficiency management in order to reduce the obstacle of the profitability of the banks Therefore, it is recommended that Commercial banks should also give more consideration to reducing their operating expenses specially their salary and rent expense as it is found to have the highest negative influence on profitability.