FACTORS AFFECTING THE PROFITABILITY OF PRIVATE COMMERCIAL BANKS IN ETHIOPIA

Abstract

This study examines internal factors affecting the profitability of private commercial banks in Ethiopia by using panel data of banks over the period of 2005-2015 for the total of six private commercial banks. Since the data is secondary data in nature, the quantitative research approach was considered. A multiple linear regression model and t-static was used to determine the relative effect of each independent variable on profitability. The key measures of profitability (dependent variables) used to analyze in this study was Return on Asset (ROA). Bank-specific factors, which were incorporated into the regression models, were deposit amount, loan amount, credit risk management, cost efficiency, capital, size of the bank and liquidity. The findings of the study show that loan amount have statistically significant and positive relationship with banks’ profitability. On the other hand, variables like deposit amount, cost efficiency and liquidity have a negative and statistically significant relationship with banks’ profitability. However, the relationship for capital, credit risk management and size of the bank is found to be statistically insignificant. The study suggests that focusing and reengineering the banks alongside the key internal drivers could enhance the profitability as well as the performance of the private commercial banks in Ethiopia.