Factors Affecting Banks Profitability: An Empirical Study on Ethiopian Private Commercial Banks

Abstract

This study examined factors affecting profitability of private commercial banks' in Ethiopia. The study adopted quantitative research approach and the statistical cost accounting model was used to estimate the profitability, which was measured by return on asset as a function of balance sheet, industry specific and macroeconomic explanatory variables. The finding of the study show that loan and advance, current deposit, other liabilities and gross domestic product have statistically significant and positive relationship with banks' profitability. On the other hand, variables like fixed deposit, market concentration have a negative and statistically significant relationship with banks' profitability. However, the relationship of deposit with other banks, sum of investment, saving deposit and inflation is found to be statistically insignificant. As a result, the study recommended that private commercial banks should focus on increasing public awareness to mobilize more savings this will enhance their performance in provision of loans and advance to customers. Finally, private commercial banks should not only be concerned about internal structures and policies, but they must consider both the internal environment and the macroeconomic environment together in fashioning out strategies to improve their profitability. Key words: Asset Liability Management, Statistical Cost Accounting Model, Profitability