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.
Table of Contents
1. Introduction
1.1. Statement of the Problem
1.2. Scope and Objective of the Study
1.3. Hypothesis of the Study
1.4. Organization of the Paper
2. Literature Review
2.1. Traditional Measures of Performance
2.2. Economic Measures of Performance
2.3. Market-Based Measures of Performance
2.4. Determinants of Bank Profitability
2.5. Macroeconomic Determinants
2.6. Determinants Specific to the Bank
3. Research Methodology
3.1. Source and Type of Data
3.2. Method of Data Analysis
3.3. Model Specification
4. Discussion and Analysis
4.1. Descriptive Data Analysis
4.1.1. Ownership Structure and Banks Profitability in Ethiopia
4.1.2. ROA and ROE for Ethiopian Commercial Banks
4.2. Econometrics Investigation
5. Conclusion and Recommendation
5.1. Conclusion
5.2. The Way Forward
Research Objectives and Themes
The primary objective of this paper is to empirically analyze the impact of various bank-specific and macroeconomic factors on the profitability of selected Ethiopian private commercial banks over the period from 2005 to 2014, using both descriptive analysis and random effect panel econometrics.
- Impact of internal bank-specific determinants such as bank size, capital, and credit risk on profitability.
- Role of macroeconomic indicators including GDP growth rate and inflation in explaining bank performance.
- Comparative analysis of profitability measures (ROA and ROE) between private and state-owned commercial banks.
- Evaluation of the relationship between branch expansion and bank efficiency.
- Policy implications for sustainable growth and stability in the Ethiopian banking sector.
Excerpt from the Book
2.1. Traditional Measures of Performance
Traditional performance measures are similar to those applied in other industries, with return on assets (RoA), return on equity (RoE), Net interest margin (NIM) being the most widely used.
The return on assets (RoA) is the net income for the year divided by total assets, usually the average value over the year.
Return on assets = net income (profit after tax) / average total assets
Return on assets is an internal performance measure of shareholder value, and it is by far the most popular measure of performance, since: It proposes a direct assessment of the financial return of a shareholder’s investment; It is easily available for analysts, only relying upon public information; and It allows for comparison between different companies or different sectors of the economy.
Chapter Summaries
1. Introduction: Outlines the significance of bank profitability, states the research problem regarding performance variations in the Ethiopian banking sector, and defines the scope, objectives, and hypotheses.
2. Literature Review: Provides a comprehensive overview of conceptual frameworks, including traditional, economic, and market-based performance measures, while discussing established determinants of bank profitability.
3. Research Methodology: Details the source of data from the National Bank of Ethiopia and describes the econometric model (random effect panel data analysis) used to test the determinants of profitability.
4. Discussion and Analysis: Presents descriptive findings on deposit trends and bank ownership, followed by the regression analysis examining how variables like bank size, interest rate spread, and GDP impact ROA and ROE.
5. Conclusion and Recommendation: Summarizes key empirical findings regarding the factors influencing bank profitability and provides policy recommendations to promote competitive and stable banking practices.
Keywords
Profitability, Determinant, Private Commercial Banks, Ethiopia, Return on Asset (ROA), Return on Equity (ROE), Macro-economic factors, GDP growth, Inflation, Bank size, Econometrics, Panel data, Banking sector, Financial performance, Interest rate spread.
Frequently Asked Questions
What is the fundamental focus of this research paper?
The paper examines the various determinants that influence the profitability of private commercial banks in Ethiopia, specifically looking at both bank-specific attributes and macroeconomic environmental factors.
Which key factors are identified as determinants of bank profitability?
The research analyzes variables such as bank size, loan-to-deposit ratio, bank branch expansion, loan concentration index, interest rate spread, GDP growth rate, and inflation.
What is the primary objective of this study?
The main objective is to empirically assess how internal and external factors affect the Return on Asset (ROA) and Return on Equity (ROE) of selected private Ethiopian banks between 2005 and 2014.
Which research methodology is employed in this study?
The author employs a combination of descriptive data analysis and random effect panel econometrics to evaluate the relationship between the independent variables and bank profitability.
What does the main body of the paper cover?
The main body covers the literature review on performance metrics, the specification of the regression model, descriptive statistics regarding the Ethiopian banking landscape, and the detailed discussion of the econometric results.
How are the results of the research characterized?
The results identify bank size, interest rate spread, and output growth as significant drivers of profitability, providing insights into the economies of scale and the impact of macroeconomic stability on banks.
How does the profitability of private banks in Ethiopia compare to state-owned banks?
The study notes that private banks generally exhibit higher Return on Asset (ROA) ratios compared to their state-owned counterparts, though performance trends vary significantly between individual institutions.
What unique insight does the paper offer regarding inflation and bank profits?
The paper suggests that inflation has a positive impact on bank profitability in the context of Ethiopia, likely because banks are able to adjust lending rates relative to deposit rates to widen their profit margins.
What is the policy recommendation regarding bank size?
The author recommends that the positive influence of bank size should be viewed as a signal for commercial banks to consider mergers to achieve scale advantages and improved cost efficiencies.
- Arbeit zitieren
- Moges Endalamaw Yigermal (Autor:in), 2017, The Determinants of Private Commercial Banks Profitability. In the Case of Selected Ethiopian Private Banks, München, GRIN Verlag, https://www.grin.com/document/414626
