FACTORS AFFECTING PROFITABILITY OF COMMERCIAL BANKS IN ETHOPIA

Abstract

LAMESA D. (Ass. Prof) The purpose of this study is to examine the factors affecting of bank-specific and macroeconomic Factors affecting commercial banks profitability in Ethiopia. The study used panel data of eight commercial banks from year 2007 to 2018. The study employed an explanatory type of research and secondary financial data were used. Fixed effect regression model was applied to investigate the impact of bank size, capital adequacy, liquidity risk, income diversification, Return on equity, equity multiplier, credit risk, foreign exchange rate, inflation rate and real gross domestic product on profitability. Return on assets (ROA) was used as a measure of profitability. Based on the result of hausman specification test the study used fixed effect model. The major findings of the study show that income diversification, capital adequacy, return on asset and bank size has statistically significant and positive relationship with banks’ profitability. Further, the results from the panel regression suggest that, credit risk and liquidity risk have a negative and statistically significant relationship with banks’ profitability. However, the positive relationship for inflation rate, GDP and foreign exchange rate is found to be statistically insignificant. The studies suggest focusing and redesign the firms together with significant key internal and external drivers of profitability of commercials banks in Ethiopia. Keywords: Determinants, External Factors, Internal Factors, Profitability, Commercial Banks