FACTORS AFFECTING THE PROFITABILITY OF PRIVATE COMMERCIAL BANKS IN ETHIOPIA

Abstract

Due to significant contribution of private commercial banks in the economic progress of Ethiopia, this study examines 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. The explanatory research design and quantitative research approach was applied in the study. Using multiple linear regression model and t-static analysis on yearly data collected from the annual reports of those sample private commercial banks in Ethiopia. Profitability is measured by return on assets (ROA). The bank-specific factors, which were incorporated into the models, were credit risk management, cost efficiency, capital adequacy, size of the bank, liquidity, deposit amount and loan amount; and external variables included in the model were inflation rate and GDP growth. It was found that loan amount with positive relation, and deposit amount, cost efficiency and liquidity has statistically significant effect on banks’ profitability in a negative relationship. On the other hand, variables like capital adequacy, bank size, credit risk management, inflation and GDP were found to have statistically insignificant. As a result, the study recommended that private commercial banks should on focusing and reengineering the banks alongside the key internal and external drivers and this will enhance their performance and to improve their profitability.