THE IMPACT OF ASSET STRUCTURE ON FINANCIAL PERFORMANCE OF PRIVATE COMMERCIAL BANKS IN ETHIOPIA

Abstract

The main goal of every banking institution is to be profitable in order to maintain stability and sustainable growth. Asset structure is viewed as the relative proportion of vital economic resources owned by the company which is expected to provide benefits. The main purpose of this study was to examine the impact of asset structure on the financial performance of selected private commercial banks in Ethiopia. This study adopted explanatory research design to understand cause and effect relation between components of asset and its financial performance. In the mean time, quantitative approach was used to construct empirical model. Secondary data was collected from thirteen private commercial banks for the period of 2011-2017. Out of sixteen, thirteen private commercial banks and seven years period were purposely selected in order to create constant panel and the availability of complete data for those banks with specific period. Return on asset was used as a measure of banks’ financial performance which was dependent variable and four components of asset including cash holding, fixed asset, foreign bank deposit and NBE Bills were used as independent variables. Size of the bank was used as control variable. Pooled panel regression model was applied to analyze the data. The result indicated that cash holding has a positive but marginally insignificant effect on financial performance, fixed asset and foreign banks deposit have positive and significant effect on financial performance and NBE Bills has negative and significant effect on banks financial performance. Asset structure has a significant effect on the financial performance in the banking sector. Therefore, the banks need to optimize their asset structure so as to realize maximum profit and minimize cost of fund based on the result of the study.