The Determinants of Private Commercial Banks Profitability: In the Case of Selected Ethiopian Private Banks
International Journal of Economic Behavior and Organization
Volume 5, Issue 1, February 2017, Pages: 25-35
Received: Jul. 19, 2016; Accepted: Jan. 29, 2017; Published: Mar. 4, 2017
Views 1629      Downloads 109
Author
Moges Endalamaw Yigermal, Monetary and Financial Analysis Directorate, National Bank of Ethiopia, Addis Ababa, Ethiopia
Article Tools
Follow on us
Abstract
The main objective of the paper is to analyze the impact of bank specific and macro-economic factors on the profitability of selected Ethiopian private commercial banks over the period of 2005 to 2014. To meet the objective, both descriptive and random effect panel econometrics method of data analysis has been employed. The study uses both return on asset (ROA) and return on equity (ROE) as a measurement for banks profitability. Private Banks profit after tax gets increasing year after year and their ROA is found to be three percent on average. The deposit share of private commercial banks reached above 30 percent in 2014, while it was only 10 percent in 2000. The panel econometrics result shows that, the variable bank size and GDP growth rate has a positive and significant impact on private commercial banks ROA and ROE. While, interest rate spread has a negative and significant impact. The variable Loan to deposit ratio has negative and significant impact on banks ROA while, it has no effect on their ROE. Inflation also an important variable in explaining ROA at 10% significant level but, it has no effect on ROE. The other important variable in explaining ROE is loan concentration index it has positive and significant impact on banks ROE. But, it does not significantly explain ROA. As a recommendation the significant and positive impact of Bank size can be taken as a good signal for commercial banks to merge and to have scale advantage. The significant impact of macro-economic variables in explaining banks profit is an indicator to designed policies that promote sustainable output growth and controlling inflation to have stable banking sector.
Keywords
Profitability, Determinant, Private Commercial Banks
To cite this article
Moges Endalamaw Yigermal, The Determinants of Private Commercial Banks Profitability: In the Case of Selected Ethiopian Private Banks, International Journal of Economic Behavior and Organization. Vol. 5, No. 1, 2017, pp. 25-35. doi: 10.11648/j.ijebo.20170501.15
Copyright
Copyright © 2017 Authors retain the copyright of this article.
This article is an open access article distributed under the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0/) which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
References
[1]
Ahmad Aref Almazari1 (2014), Impact of Internal Factors on Bank Profitability: Comparative Study between Saudi Arabia and Jordan. Journal of Applied Finance & Banking, vol. 4, no. 1, 2014, 125-140.
[2]
AmerAzlan Abdul Jamal and MasyhuriHamidi, (2012), Determinants of Commercial Banks’ Return on Asset: Panel Evidence from Malaysia. International Journal of Commerce, Business and Management (IJCBM), ISSN: 2319–2828, Vol. 1, No3, December 2012.
[3]
Anteneh, TilahunMehari, and A. S. Chawla. "Determinants of Commercial Banks Profitability: Empirical Evidence from Ethiopia. ZENITH International Journal of Multidisciplinary Research 6.1 (2016): 79-89.
[4]
Chioma, Adanma and Clementina (2014), Empirical Study of the Impact of Inflation on Bank Performance. Humanity& Social Sciences Journal 9 (2): 61-71, 2014.
[5]
Christos K. Staikouras and Geoffrey E. Wood, (2004), The Determinants Of European Bank Profitability. International Business & Economics Research Journal, Vol 3, No 6 (2004).
[6]
European Central Bank (2010), Beyond ROE – how to measure bank performance, Appendix to the report on EU banking structures.
[7]
Flamini, V., McDonald, C. & Schumacher, L. (2009). The determinants of commercial bank profitability in Sub-Saharan Africa, IMF Working paper WP/09/15.
[8]
GODDARD, J. et al. (2004), the profitability of European banks: a cross-sectional and dynamic panel analysis. Manchester School, vol. 72, no. 3, pp. 363-381.
[9]
HaroonJabbar, (2014,) Determinants of Banks Profitability. IOSR Journal of Business and Management (IOSR-JBM), Volume 16, Issue 1. Ver. IV (Jan. 2014), PP 109-113.
[10]
Jaber J (2014), the Impact of Internal and External Factors on Commercial Bank Profitability in Jordan. International Journal of Business and Management; Vol. 9, No. 4; 2014.
[11]
Kozo Harimaya and KazumineKond (2010), the Effects of Branch Expansion on Bank Efficiency: Evidence from Japanese Regional Banks.
[12]
Samuel Alemu, (2015), Determinants of Commercial Banks Profitability: The Case of Ethiopian Commercial Banks.
[13]
Susan MoraaOnuonga, (2014), The Analysis of Profitability of Kenya`s Top Six Commercial Banks: Internal Factor Analysis. American International Journal of Social Science Vol. 3, No. 5; October 2014.
[14]
Waqas Tariq (2014), Determinants of Commercial Banks Profitability. International Journal of Accounting and Financial Reporting, Vol. 4, No. 2.
[15]
Zimmerman (1996), the Determinants of European Bank Profitability. International Business & Economics Research Journal, Volume 3, Number 6.
ADDRESS
Science Publishing Group
1 Rockefeller Plaza,
10th and 11th Floors,
New York, NY 10020
U.S.A.
Tel: (001)347-983-5186