Determinants of the Profitability of Commercial Banks in Ethiopia

The purpose of this study was to examine the determinants of the profitability of commercial banks in Ethiopia. To this end, explanatory study was carried out on the selected nine commercial banks. The study observes the effect of independent variables on the profitability, Return on Assets (ROA) was used as a fundamental index of profitability. The researcher used secondary data in general and annual financial statements of selected commercial banks, and macroeconomic data about GDP growth rate and inflation rate in particular. The study employed a purposive sampling technique to select a public commercial bank (Commercial Bank of Ethiopia), and eight private commercial banks (Oromia International Bank, Dashen Bank, Abyssinia Bank, Zemen Bank, Birhan international Bank, Lion International Bank, Cooperative Bank of Oromia and Addis international bank) from private banks operating in Ethiopia covering the period from 2016 to 2020. The study examines the determinants of Ethiopian commercial banks’ profitability by employing bank-specific variables (capital adequacy, operational cost efficiency, employee efficiency, customer deposit, non-interest income, credit risk, liquidity risk, overhead, net interest margin and non-performing loans), industry-specific variables (bank size and market concentration),  and macroeconomic variables (GDP growth rate and inflation rate). Data was analyzed using inferential statistics. Specifically, the researcher has used a linear regression model with the aid of SPSS version 21 for examining the determinants of profitability. A total of fourteen explanatory variables were included in this and out of these, 10 variables were found to have a statistically significant impact on the profitability of commercial banks.  Capital adequacy, employee efficiency, bank size and market concentration have positive coefficient and statically significant impact on the commercial banks’ profitability. On the other hand, operational cost efficiency, credit risk, liquidity risk, overhead, non-performing loans and inflation rate have negative significant impact on the banks’ profitability.