African Journal of
Business Management

  • Abbreviation: Afr. J. Bus. Manage.
  • Language: English
  • ISSN: 1993-8233
  • DOI: 10.5897/AJBM
  • Start Year: 2007
  • Published Articles: 3982

Full Length Research Paper

Determinant of financial performance of commercial banks in Ethiopia: Special emphasis on private commercial banks

Elshaday Teshome
  • Elshaday Teshome
  • Senior Auditor, United Bank, Ethiopia.
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Kenenisa Debela
  • Kenenisa Debela
  • Department of Accounting and Finance, Jimma University, Ethiopia.
  • Google Scholar
Mohammed Sultan
  • Mohammed Sultan
  • Department of Accounting and Finance, Jimma University, Ethiopia.
  • Google Scholar


  •  Received: 14 November 2017
  •  Accepted: 12 December 2017
  •  Published: 14 January 2018

Abstract

This study aims at examining the determinants of the financial performance of private commercial banks in Ethiopia. The study uses secondary data for eight private banks which are in the industry for more than ten years. These banks are chosen from sixteen private commercial banks which are currently functional in Ethiopia banking industry. The data for this study is obtained from annual reports of the banks, minutes and the national bank report. Correlation and multiple linear regressions of panel data for the eight banks for the years 2007 to 2016 is analyzed using random effect model. E-Views 9 software was used for analyzing the data. Return on Asset and Return on Equity are the selected dependent variables while non-performing loan, capital adequacy ratio, bank size, leverage ratio, credit interest income ratio, loan loss provision ratio and operation cost efficiency were the independent variables. Results show that Capital Adequacy Ratio (CAR), Credit Interest Income (CIR) and Size of the bank (SIZE) have positive and statistically significant effect on financial performance. Non-performing Loans (NPLs), Loan Loss Provision (LLP), Leverage Ratio (LR) and Operational Cost Efficiency (OCE) have negative and statistically significant effect on banks’ financial performance. The study suggests that Ethiopian commercial banks are advised to manage their loan loss, be cost efficient, and fix their leverage ratio at maximum level to enhance their profitability. Key words: Ethiopia, commercial banks, determinants, financial performance.