Factors Affecting Banks Profitability: The Case of Commercial Banks in Ethiopia

Abstract

The purpose of this study was to assess factors affecting profitability of Ethiopian private bankunder the study period covering from 2014 to 2023. An explanatory research design, which involved quantitative and qualitative research approach, was employed. Ten years Panel data was obtained from audited financial statements of fifteen selected private banks in Ethiopia. In addition to this, key informant interview was also made from higher officials of banks to compare with the quantitative regression result. Both descriptive and inferential statistics were used in order to analyze the collected data. Fixed effect model regression was used to investigate the factors affecting profitability of private banks in Ethiopia. Accordingly, explanatory variables that are incorporated in this study firm size, and liquidity were positively and significantly influenced profitability of private banks in Ethiopia. On the other hand, growth, leverage and inflationnegatively and significantly affected profitability of private banks in Ethiopia. However level of GDP and foreign exchange rate were not a significant factor for profitability of private banks in Ethiopia. Therefore, the major factors affecting profitability of private commercial banks in Ethiopia are firm size, liquidity, growth, leverage and inflation. It is recommended that private banks should increase their total asset through collecting deposit from customers, increasing shareholder’s equity, or other equity and debt financing ways or may be through merger and acquisitions to enhance their profitability.