A policy of openness of the domestic banking markets to international bank pm1icipationrnis not a universally accepted argument. While arguments in favor of foreign bank entryrnare argued to be broad based, there exist a se t of concerns with regard to the potentiallyrnadverse effects of opening to international involvement. But neither side of the sernarguments is supported by hard evidence.rnThis paper in the first place attempts to investigate what the determinants of profitabilityrnin domestic banking markets are. Afterwards, the implications of foreign bank entry tornthe profitability of the domestic sector will be analyzed based on the less on s taught fromrnthe experiences of the selected East African countries.rnin order to attempt it s objectives the paper employs a dynamic econometric model, whichrncaptures the extent of barriers to entry on the profitability of the local sector thro ugh therncoefficient of the lagged dependent variable (lagged pro fit ). The problem ofrninconsistency and bi as of OLS estimators is handled by application of the Arellano andrnBover(J 995) GMM estimation method. This method exploits the orthogonality conditionrnThat exists between lagged levels and differences in the difference equation and that ofrninstruments of lagged differences and the levels in the original equation.rnAccordingly, it is found that bank specific variables like equity to total assets, customerrnand short term fi.ll1din g to total assets, and productivity are highly significantrndeterminants of profitability while the credit risk to total loans and overheads to totalrnassets, though no t that significant, they d o have an inverse relationship With bankrnprofitability. Furthermore, both the industry specific variables and the macro economicrnvariables are found to be significant determinants . The coefficient of the laggedrndependent variableals indicates that the Ethiopian commercial banking market is notrncharacterized by competitive conditions and profits show a tendency to persist from on ernyear to the other. This implies that, entry of foreign banks will reduce the profitability ofrnthe local commercial banks as international banks exploit their competitive advantage srnand as they internalize the economic benefit of the knowledge they created , possiblyrnsubjecting domestic banks to operate at a reduced rate of return where the issue of theirrnsurvival may be put in to question .rnconclusively, since most of these determinants are highly affected by the quality ofrnmanagement either through its direct or in direct influence, it c ml be suggested thatrnoptimal policies to bank management is the right direction to follow in order to spurrnprogress .