Factors Affecting Profitability An Empirical Study On Ethiopian Banking Industry

This study examines the bank-specific, industry-specific and macro-economic factorsrnaffecting bank profitability for a total of eight commercial banks in Ethiopia, covering thernperiod of 2000-2011. To this end, the study adopts a mixed methods research approachrnby combining documentary analysis and in-depth interviews. The findings of the studyrnshow that capital strength, income diversification, bank size and gross domestic productrnhave statistically significant and positive relationship with banks’ profitability. On thernother hand, variables like operational efficiency and asset quality have a negative andrnstatistically significant relationship with banks’ profitability. However, the relationshiprnfor liquidity risk, concentration and inflation is found to be statistically insignificant. Thernstudy suggests that focusing and reengineering the banks alongside the key internalrndrivers could enhance the profitability as well as the performance of the commercialrnbanks in Ethiopia. Moreover, banks in Ethiopia should not only be concerned aboutrninternal structures and policies, but they must consider both the internal environment andrnthe macroeconomic environment together in fashioning out strategies to improve theirrnperformance or profits. Finally, the government needs to revisit its requirements imposedrnsolely on private banks like investing 27% of their total loans on bonds at a relativelyrnlower interest rate

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