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Factors Affecting Profitability of Banks: Empirical Evidence from Ethiopian Private Commercial Banks

Received: 24 December 2018     Accepted: 20 January 2019     Published: 31 January 2019
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Abstract

The objective of this study was investigating factors affecting the profitability of private commercial banks in Ethiopia, covering ten years period from 2008 to 2017, using unbalanced panel data from fourteen Ethiopian private commercial banks. In this study, survey was used as a method of a research design, which allows collecting quantitative data that was analyzed quantitatively using STATA 13 software. The variables covered under this study were both bank specific factors (capital adequacy, bank size, liquidity risk, credit risk, and operation efficiency) and macroeconomic factors (real GDP growth rate, inflation, foreign exchange rate, and lending interest rate). The fixed effect regression output revealed that from bank specific variables; capital adequacy and bank size have significant positive effect on profitability. Besides, operation efficiency has a negative significant effect on profitability, but liquidity risk and credit risk were found not powerful variables in the determination of banks profitability. From macroeconomic variables; foreign exchange rate and lending interest rate were found to have significant (though at 10% level of significance) negative effect on Ethiopian private commercial banks profitability. Conversely, real GDP growth rate and inflation rate were found statistically insignificant. Generally, in this study bank specific factors have more significant effect than macroeconomic factors. So, private commercial banks in Ethiopia were suggested to increase their stockholders equity, asset size and implement an effective and efficient expense management practice in order to boost their profitability.

Published in Journal of Investment and Management (Volume 8, Issue 1)
DOI 10.11648/j.jim.20190801.12
Page(s) 8-15
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2019. Published by Science Publishing Group

Keywords

Bank Specific and Macroeconomic Factors, Profitability, Private Commercial Banks, Ethiopia

References
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[2] Ani, W. U., Ugwunta, D. O., Ezeudu, I. J., & Ugwuanyi, G. O. (2012). An empirical assessment of the determinants of bank profitability in Nigeria: Bank characteristics panel evidence. Journal of Accounting and Taxation, 4(3), 38-43.
[3] Athanasoglou, P. P., Brissimis, S. N., & Delis, M. D. (2005). Bank specific, Industry specific and macroeconomic determinants of bank profitability. Greece.
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[5] Cameron, A., & Trivedi, P. (2009). Micro econometrics using Stata, Stata Corp LP.
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[9] Elefachew, M., & Rao, H. P. (2016). The impact of industrial diversification on Ethiopian banks' profitability. International Journal of Commerce and Management Research, 2 (10), 13- 17.
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[12] Gemechu, S. A. (2016). Determinants of Banks' Profitability Evidence from Banking Industry in Ethiopia. International Journal of Economics, Commerce and Management, IV (2), 442-463.
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[18] Kosmidou, K., Tanna, S., & Pasiouras, F. (2012). Determinants of profitability of domestic UK commercial banks: panel evidence from the period 1995-2002.
[19] Majid Kabajeh, M. A., AL Nu’aimat, S. M., & Dahmash, N. F. (2012). The Relationship between the ROA, ROE and ROI Ratios with Jordanian Insurance Public Companies Market Share Prices. International Journal of Humanities and Social Science, 2, 115-120.
[20] National Bank of Ethiopia. (2016/17). Annual report.
[21] Obamuyi, T. M. (2013). Determinants of Banks' Profitability in a Developing Economy: Evidence from Nigeria. Organizations and Markets in Emerging Econmies, 4 (2(8)), 97-111.
[22] Ponce, A. T. (2009). What Determines the Profitability of Banks? Evidence from Spain. Pablo de Olavide University, Department of Business Administration.
[23] Rao, R. M., & Tekeste, L. B. (2012). Determinants of Profitability of Commercial Banks in a Developing Country Evidence from Ethiopia. International Journal of Accounting and Financial Management research, 2 (3), 1-20.
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  • APA Style

    Yalemselam Worku Bogale. (2019). Factors Affecting Profitability of Banks: Empirical Evidence from Ethiopian Private Commercial Banks. Journal of Investment and Management, 8(1), 8-15. https://doi.org/10.11648/j.jim.20190801.12

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    ACS Style

    Yalemselam Worku Bogale. Factors Affecting Profitability of Banks: Empirical Evidence from Ethiopian Private Commercial Banks. J. Invest. Manag. 2019, 8(1), 8-15. doi: 10.11648/j.jim.20190801.12

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    AMA Style

    Yalemselam Worku Bogale. Factors Affecting Profitability of Banks: Empirical Evidence from Ethiopian Private Commercial Banks. J Invest Manag. 2019;8(1):8-15. doi: 10.11648/j.jim.20190801.12

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  • @article{10.11648/j.jim.20190801.12,
      author = {Yalemselam Worku Bogale},
      title = {Factors Affecting Profitability of Banks: Empirical Evidence from Ethiopian Private Commercial Banks},
      journal = {Journal of Investment and Management},
      volume = {8},
      number = {1},
      pages = {8-15},
      doi = {10.11648/j.jim.20190801.12},
      url = {https://doi.org/10.11648/j.jim.20190801.12},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jim.20190801.12},
      abstract = {The objective of this study was investigating factors affecting the profitability of private commercial banks in Ethiopia, covering ten years period from 2008 to 2017, using unbalanced panel data from fourteen Ethiopian private commercial banks. In this study, survey was used as a method of a research design, which allows collecting quantitative data that was analyzed quantitatively using STATA 13 software. The variables covered under this study were both bank specific factors (capital adequacy, bank size, liquidity risk, credit risk, and operation efficiency) and macroeconomic factors (real GDP growth rate, inflation, foreign exchange rate, and lending interest rate). The fixed effect regression output revealed that from bank specific variables; capital adequacy and bank size have significant positive effect on profitability. Besides, operation efficiency has a negative significant effect on profitability, but liquidity risk and credit risk were found not powerful variables in the determination of banks profitability. From macroeconomic variables; foreign exchange rate and lending interest rate were found to have significant (though at 10% level of significance) negative effect on Ethiopian private commercial banks profitability. Conversely, real GDP growth rate and inflation rate were found statistically insignificant. Generally, in this study bank specific factors have more significant effect than macroeconomic factors. So, private commercial banks in Ethiopia were suggested to increase their stockholders equity, asset size and implement an effective and efficient expense management practice in order to boost their profitability.},
     year = {2019}
    }
    

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  • TY  - JOUR
    T1  - Factors Affecting Profitability of Banks: Empirical Evidence from Ethiopian Private Commercial Banks
    AU  - Yalemselam Worku Bogale
    Y1  - 2019/01/31
    PY  - 2019
    N1  - https://doi.org/10.11648/j.jim.20190801.12
    DO  - 10.11648/j.jim.20190801.12
    T2  - Journal of Investment and Management
    JF  - Journal of Investment and Management
    JO  - Journal of Investment and Management
    SP  - 8
    EP  - 15
    PB  - Science Publishing Group
    SN  - 2328-7721
    UR  - https://doi.org/10.11648/j.jim.20190801.12
    AB  - The objective of this study was investigating factors affecting the profitability of private commercial banks in Ethiopia, covering ten years period from 2008 to 2017, using unbalanced panel data from fourteen Ethiopian private commercial banks. In this study, survey was used as a method of a research design, which allows collecting quantitative data that was analyzed quantitatively using STATA 13 software. The variables covered under this study were both bank specific factors (capital adequacy, bank size, liquidity risk, credit risk, and operation efficiency) and macroeconomic factors (real GDP growth rate, inflation, foreign exchange rate, and lending interest rate). The fixed effect regression output revealed that from bank specific variables; capital adequacy and bank size have significant positive effect on profitability. Besides, operation efficiency has a negative significant effect on profitability, but liquidity risk and credit risk were found not powerful variables in the determination of banks profitability. From macroeconomic variables; foreign exchange rate and lending interest rate were found to have significant (though at 10% level of significance) negative effect on Ethiopian private commercial banks profitability. Conversely, real GDP growth rate and inflation rate were found statistically insignificant. Generally, in this study bank specific factors have more significant effect than macroeconomic factors. So, private commercial banks in Ethiopia were suggested to increase their stockholders equity, asset size and implement an effective and efficient expense management practice in order to boost their profitability.
    VL  - 8
    IS  - 1
    ER  - 

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Author Information
  • Department of Accounting and Finance, Debre Berhan University, Debre Berhan, Ethiopia

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