The Effect Of Asset Diversification On Banks’ Financial Performance: Thecase Of Selected Private Commercial Banks In Ethiopia

Abstract

This study examines the effects of asset diversification on banks’ financial performance at commercial banks in Ethiopia using explanatory research design. The study selects ten private commercial banks out of a total of 32, except two government commercial banks, from 2011 to 20223. Financial performance is a dependent variable measured by the return on equity, while asset diversification includes financial assets, loans and advances, cash and cash equivalents, and fixed assets are independent variables which taken from National Bank. The study further controlled firm-level variables such as bank size and country-level variables such as inflation rate and Gross Domestic Product. To gather data on the asset diversification component and performance, it is apparent to use secondary data. The researcher used an explanatory research design and a quantitative research approach because the study identifies the cause and effect of asset diversification on financial performance, which is appropriate for the objective of the study. The collected data were analyzed using descriptive and inferential statistics by using STATA14. The result shows that the Key financial variables such as financial assets, cash and cash equivalents, loans and advances and fixed assets show positive contributions to bank profitability, as measured by Return on Equity. These findings highlight the importance of diversifying assets to improve financial stability and profitability within the Ethiopian banking sector. Ethiopian banks should boost performance by diversifying their asset and strategically aligning growth initiatives with national economic trends