Determinants of Bank Profitability: The case of Commercial Bank of Ethiopia

Abstract

The banking industry has experienced some profound changes in recent decades, as innovations in technology and the inevitable forces driving globalization continue to create both opportunities for growth and challenges for banking managers to remain profitable in this increasingly competitive environment. Both internal and external factors have been affecting the profitability of banks over time. this study was identified and filled the gap by providing information about the internal factors and external factors that affect profitability. The main objective of this study was to identify the determinants of bank profitability in Commercial Bank of Ethiopia by taking thirty year data from 1992 to 2022. A descriptive study design was employed. Data was collected between august 1 to and august 30, 2023 G.C. from commercial bank of Ethiopia and national bank of Ethiopia. The collected data was analyzed using multiple regression analysis approach. This study determines different factors that affect profitability of commercial bank of Ethiopia. Those identified factors are internal (asset, interest income, number of branches, non-interest expense) and external factors (GDP and inflation rate). In this study it’s found that interest income has strong positive correlation with bank profitability and followed by branch number. In contrast, asset, inflation rate and non-interest expense have a negative correlation with profitability. On the other hand, GDP have moderate correlation. It is advised that the bank extend loans and enhance loan collection strategies, such as lending for viable projects and keeping collateral, in order to boost interest income. The bank's profitability is drastically declining as a result of expenses. In order to improve performance, the bank must cut back on wasteful spending by making investments in technologies that lower operating costs, in effective management and to grow its branch network. External factors such as GDP and inflation rate is difficult to manage by the bank though it affects profitability of the bank. Therefore, the bank should facilitate loans, and service excellence in order to expand its customer base.