Determinants of banks’ profitability: Empirical evidence from banks in Ethiopia

Abstract

In today’s economy, banks play significant and irreplaceable roles in the growth of financial services, which ultimately leads to the overall success of the economy of a country. The very objective of this study was to investigate the key firm-specific and macroeconomic determinants of profitability of commercial banks in Ethiopia. The empirical analysis is carried out using the generalized method of moments (GMM) estimation of dynamic panel data from 14 banks covering 12 years of operation from 2008 to 2019. A quantitative approach and explanatory design were employed to realize the stated objectives. To achieve the study objective, secondary data were collected from annual audited financial statements of sampled banks for the stated period. The model results of the study revealed that firm size, liquidity ratio, asset tangibility, capital adequacy, leverage and real GDP growth rate have a positive and statistically significant effect on the profitability of banks, while firm age and the inflation rate have a negative but statistically insignificant effect on the profitability of banks in Ethiopia. Future studies are suggested to be conducted in this research area by incorporating variables that are other than variables used in this study and unlike this study, all other financial institutions need to be included.

Keywords:

• Bank
• determinants
• profitability
• Ethiopia
• inflation
• economy

PUBLIC INTEREST STATEMENT

This paper examines the firm specific and macroeconomic variables that determine the profitability of commercial banks in Ethiopia. It is meant to identify variables, which are impacting the performance of banks and thereby drawing attention of managements those banks towards proper handling of the relationships between performance and these variables. Therefore, it is paramount to understand how firm specific as well as macroeconomic variables such as firm size, capital adequacy, asset tangibility, GPD, inflation, etc. affects the commercial banks in Ethiopia.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

The author received no direct funding for this research.

Notes on contributors

Yonas Nigussie Isayas

Yonas Nigussie Isayas is a lecturer in the Department of Accounting and Finance, Haramaya University, Ethiopia. Besides teaching activities, he engages in different research and community services. He is currently working as a business analyst at one of Ethiopia's most prominent manufacturing companies.