IMPACT OF CORPORATE GOVERNANCE ON FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN ETHIOPIA

Abstract

ABSTRACT The objective of this study is to examines the impact of corporate governance on financial performance of commercial banks in Ethiopia using 20 years data starting from the year 2002 to 2021 with a sample of 7 banks from the total of 30 Ethiopian commercial banks. The study employed return on asset as dependent variable to measure financial performance of commercial banks and Board size, Board gender diversity, Audit committee size, Frequency of board meeting, Management Efficiency, Legal Reserve, Liquidity Ratio, Deposit to asset Ratio, Asset quality and Loan to deposit Ratio as independent variables to express financial corporate governance mechanisms quantitatively. Besides, this study also used Banks size as a control variable that are specific to commercial banks and genera to the economy as a whole. This study under the methodology section to get final output were explanatory research design, quantitative research approach, secondary source of data, purposive sampling technique and both descriptive and inferential statistics and employed both correlation analysis and panel data models of crosssectional time-series FGLS regression for data analysis. Stata 17 software has been used to analysis and to test a model accuracy. The findings stated evidence that Loan to deposit Ratio, Liquidity Ratio, Deposit to asset Ratio and Banks size positively and significantly related with return on asset. Other independent variables (such as Board size, Asset quality, Management Efficiency and Legal Reserve.) have negative and significant association with return on asset. However, Board gender diversity, audit committee and frequency of board meeting is not statistically significant with return on asset. Therefore, based on the findings the researcher recommended that it is better to increase liquidity ratio, (deposit to asset ratio, total loan and advance to total deposit with strictly management), and banks size and decrease board size, cash reserve requirements, management efficiency ratio and (asset quality with strictly follow up the timely collection of loan disbursed with interest income).