Factors Affecting Profitability Of Ethiopian Banks: The Case Of Commercial Bank Of Ethiopia

Abstract

This paper gives an overview of the profitability of commercial banks with a specific view on Ethiopia. The purpose of this study was to analyse some of the most important factors that affect the profitability of commercial banks of Ethiopia which covering the periods of 2003-2020. Profitability has an essential role in evaluating performance of banks. The best formula to measure the bank profitability is Return on Assets (ROA). The investigator has utilized Purposive sampling technique for selecting the sample units from population and secondary data was collected from financial statement of commercial bank of Ethiopia for the period from 2003 to 2020.This paper used multi-linear regression model to investigate factors affecting profitability of commercial bank of Ethiopia. The study was investigating the impact of bank-specific, industry-specific and macro-economic factors on the profitability of commercial bank of Ethiopia. The bank-specific factors that were use in this study include variables such as capital, liquidity risk, bank size, loan and advance, deposit ratio, income diversification, asset quality, operational efficiency. On the other hand in this study only one industry-specific variable and two macroeconomic conditions indicator variables were employed (concentration, GDP, inflation and interest rate). To comply with the objective of this research, the paper is primarily based on quantitative research method which is supplemented by qualitative one. In specific, multiple regression analysis was adopted to measure the effect of determinants on banks profitability quantitatively. For testing the research hypotheses, commercial bank of Ethiopia is selected as a sample and the necessary financial data will collected. As researcher recommendation, lack of innovative products and fear of risky investments by banks themselves are also factors that can affect Ethiopian banks profitability negatively, Ethiopian banks should try their best in order to provide new banking services and to participate in risky investment areas which may in turn increases their profitability significantly