Determinants of the Financial Performance of Private Commercial Banks in Ethiopia: Bank Specific Factors Analysis

Abstract

The main purpose of this paper is to investigate the bank specific factors which can affect the financial performance of private commercial banks in Ethiopia. A total of 6 private commercial banks (those having well organized financial data till 2017) were purposefully taken & their audited annual financial reports were analyzed for the period of 2011-2017. For this purpose, descriptive statistic, Pearson Correlation Coefficient and Multiple Linear Regression Analytical approaches were applied. In this study, return on equity, return on asset and net interest margin as the dependent variables and bank specific factors like banks size, liquidity management, asset quality, management efficiency and capital adequacy as independent variables were used. Any autocorrelation problem was checked. The results indicated that capital adequacy, management efficiency and size of banks have positive and statistically significant effect on financial performance of private commercial banks of Ethiopia measured by ROA, ROE and NIM. But, liquidity management has negatively significant impact on financial performance of the banks (ROE). Finally, the study also depicted that asset quality was not statistically significant determinant of sound financial performance of private commercial banks in Ethiopia. Therefore, due attention should be given in ensuring adequate capital, optimum liquidity, efficient expense management system and adequate size of assets by commercial banks for better performance and profitability in their own area of business.