Determinants of Banks’ Profitability: The Case of Commercial Banks in Ethiopia

Abstract

This study investigates the factors influencing the profitability of Ethiopian commercial banks between 2009 and 2018, focusing on 11 banks selected from a total of 18. Using secondary data, including financial statements, and reports from the National Bank of Ethiopia, and the Ministry of Finance and Economic Cooperation, the study employed a quantitative approach with Return on Assets (ROA) as the profitability indicator. A random effects regression model was applied using Stata 13 software. Key findings highlight that bank size, capital adequacy, liquidity risk, operational efficiency, gross domestic product (GDP), and income diversification significantly and positively influence profitability. On the other hand, liquidity risk, operational efficiency, and banking sector development negatively impact profitability. Additionally, funding costs, inflation, and foreign exchange rates were found to have no statistically significant effect. The study suggests that Ethiopian commercial banks should focus on improving internal and external drivers of profitability by enhancing operational efficiency, diversifying income sources, and aligning strategies with macroeconomic conditions to optimize profitability and resilience in the face of economic fluctuations.