DETERMINANTS OF PROFITABILITY IN ETHIOPIAN PRIVATE COMMERCIAL BANKS: EVIDENCE FROM 2017–2023

Abstract

The major objective of this study was to examine both bank-specific factors, such as capital adequacy, liquidity, bank size, bank age, asset tangibility and leverage, as well as macroeconomic variables, including GDP growth and inflation, to determine their impact on profitability, as measured by Return on Assets (ROA). The research employed a quantitative approach, and used both descriptive and explanatory research designs to analyze panel data from five private commercial banks. The banks were Awash Bank, Abyssinia Bank, Dashen Bank, Nib Bank, and Zemen Bank and studied over the period from 2017 to 2023. Secondary data were obtained from the audited financial statements of the selected banks and macroeconomic reports from the National Bank of Ethiopia (NBE). The analysis employed EViews 9 software for regression analysis, revealing significant relationships between various factors and profitability, measured by Return on Assets (ROA).Various diagnostic tests, including multicollinearity, heteroscedasticity, normality, and autocorrelation, were conducted to ensure the reliability of the Ordinary Least Squares (OLS) regression model. The study finds indicate that bank size significantly increased ROA by effect size of 7.9% (β = 0.079, p = 0.007), while liquidity positively influenced profitability, with an increase of 11.9% (β = 0.119, p = 0.038). Additionally, leverage showed a positive impact, enhancing ROA by 2.2% (β = 0.022, p = 0.005). Asset tangibility was positively correlated with profitability, although not statistically significant (β = 1.638, p = 0.165). The study also found that GDP growth had a positive effect size on profitability (β = 1.967, p = 0.028), while inflation was inversely related to ROA, though not significantly affect financial performance. Accordingly, the study suggests that private banks need to work on their capital structure and asset management strategies. Managing liquidity to grow stability and profitability and managing debt to reduce financial risk are important. Also, regulators have the responsibility to generate an environment of low inflation and maintained stability in the economy that permits the banking sector to develop. This study adds to the literature on Ethiopian banking profitability and will be useful to policy makers, banks, and researchers in the future.