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Determinants Of Commercial Banks’ Performance In Ethiopia 2013
ST. MARY’S UNIVERSITY

SCHOOL OF GRADUATE STUDIES
DETERMINANTS OF COMMERCIAL BANKS’

PERFORMANCE IN ETHIOPIA
BY
TESFAYE KASSA
ID. SGS1/0117/2004
OCTOBER, 2013
ADDIS ABABA, ETHIOPIA
1

BY
TESFAYE KASSA
ID. SGS1/0117/2004
A THESIS SUBMITTED TO ST.MARY’S UNIVERSITY,

SCHOOL OF GRADUATE STUDIES IN PARTIAL
FULFILLMENT OF THE REQUIREMENTS FOR THE
DEGREE OF MASTER OF BUSINESS ADMINISTRATION
OCTOBER, 2013
ADDIS ABABA, ETHIOPIA
2
ST. MARY’S UNIVERSITY

SCHOOL OF GRADUATE STUDIES
FACULTY OF BUSINESS

BY
TESFAYE KASSA
ID. SGS1/0117/2004
APPROVED BY BOARD OF EXAMINERS

________________________ __________________
Dean, Graduate Studies Signature & Date
______________________________ _____________________
Advisor Signature & Date
______________________________ _____________________
External Examiner Signature & Date
______________________________ _____________________
Internal Examiner Signature & Date
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ACKNOWLEDGEMENTS
A research report requires not only substant ial co mmit ment and perso nal
sacrifice o f the researcher but also it depends on support and encouragement
of many others including pro fessio nals, family and co lleagues. I would like
to express my appreciat io n to the fo llowing persons for their suggest io n,
support and contribut io n.
First, I would like to thank the almight y GOD, the Co mpassio nate, the Most
Merciful and Source of Knowledge & Wisdom, who bestowed upon me the
healt h, the power of co mmunicat ion and the audacit y to accomplish this
thesis.
I would like to sincerely thank my advisor Dr. Degefa Deressa for his
constructive co mments, valuable suggest ions and good guidance. I equally
thank him for his kindness and necessary encouragement.
I also would like to thank to the staff o f Nat ional banks who gave me bank
sector and macroeconomic data.
Then my heartfelt grat itude goes to my wife, Mulu G/Egziabher for her
cont inuous encouragement and my daught er So lyana Tesfaye for creat ing
conducive environment where I focused on my study.
I add a special note of admirat ion and sincere gratefulness to Ato

Hailemariam Zeleke and W/r Mulunesh Kassa, wit hout their moral and
material support, it would have been impossible for me to go through this
piece o f work.
My appreciat io n also goes to all ZTF Consult ancy staffs who gave me
technical support and encouragement in co nduct ing the research.
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LIST OF ABBREVIATIONS AND ACRONYMS
ROA Return on Average Asset
ROE Return on Average Equit y
NIM Net Interest Margin
CAR Capital adequacy rat io
CIR Cost to inco me rat io
DIV Diversificat io n
LIQ Liquidit y
LDR Loan Deposit Rat io
HHI Herfindahl-Hirschman Index
SBS Size Bank System
GDP Gross Domest ic Product
INF Annual Inflat io n
ECB European Central Bank
NBE Nat ional Bank of Ethiopia
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ABSTRACT
The study was carried out to empirically explore the bank specific, industry
specific and macroeconomic determinants of Ethiopian commercial banks’
performance using unbalanced 10 years (2003-2012) annual audited
financial statements of 16 banks and macroeconomic data. It covers 100% of
the population (commercial banks in Ethiopia) which are operating full years
in the study period. The study used three indicators of profitability as
dependent variables: Return on Asset (ROA), Return on Equity (ROE) and
Net Interest Margin (NIM) and ten explanatory variables: Bank Size, Capital
adequacy, Operational efficiency, Liquidity risk, Income Diversification, and
Loan to Deposit Ratio from bank specific factors, Bank Concentration and
Size Bank System from industry specific factors and Real GDP Gro wth rate
and Annual Inflation Rate from macroeconomic factors. Fixed effect was used
for the ROA model, and Random effect for ROE and NIM models based on
Hausman test.
The empirical result revealed that all bank specific factors except Loan to
Deposit Ratio are statistically significant in determining profitability of
Ethiopian commercial banks. Among them Cost Income Ratio and Liquidity
negatively affect bank performance. There are also significant associations
between Concentration and Size Bank System with profitability. However, no
evidence is found about the relation between macroeconomic factors and
performance of banks. In general, the overall empirical findings provide
evidence that the profitability of Ethiopian commercial banks are mainly
dominated by bank-specific factors which are on the hands of the
management of the banks. So, the study suggests to the banks’ managers and
policy makers to give high concern on the internal factors of profitability and
set direction to manage the most dominant factors of performance.
iii
Table of Content
ACKNOWLEDGEMENTS ......................................................................................................... i
LIST OF ABBREVIATIONS AND ACRONYMS ...................................................................... ii
ABSTRACT .............................................................................................................................. iii
Table of Content ........................................................................................................................ iv
List of Table .............................................................................................................................. vi
List of Figures........................................................................................................................... vii
CHAPTER ONE ......................................................................................................................... 1
INTRODUCTION ...................................................................................................................... 1
1.1 Back ground of the Study ................................................................................................ 1
1.2 Background of Banking Industry in Ethiopia ......................................................................... 3
1.3 Statement of the Problem ...................................................................................................... 5
1.4 Research Questions ............................................................................................................... 7
1.5 Objectives of the Study ......................................................................................................... 7
1.6 Hypothesis ............................................................................................................................ 8
1.7 Significance of the Study....................................................................................................... 9
1.8 Delimitation/Scope of the Study .......................................................................................... 10
1.9 Organization of the Paper .................................................................................................... 10
CHAPTER TWO ...................................................................................................................... 11
LITERATURE REVIEW .......................................................................................................... 11
2.1 Analytical Literature ........................................................................................................... 11
2.1.1 Bank performance ............................................................................................................ 11
2.1.2 Bank Performance Indicators. ........................................................................................... 12
2.1.3 Bank Specific Variables ................................................................................................... 15
2.1.4 Industry Specific Determinants ......................................................................................... 19
2.1.5 Macroeconomic Determinants .......................................................................................... 20
2.2 Empirical Literature ............................................................................................................ 22
CHAPTER THREE .................................................................................................................. 29
Research Design and Methodology ........................................................................................... 29
3.1 Research design .................................................................................................................. 29
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3.2 Sample and Sampling Techniques ....................................................................................... 29

3.3 Source and Tools/Instruments of Data Collection ................................................................ 30
3.4 Methods of Data Analysis ................................................................................................... 30
3.4.1 Panel Data ........................................................................................................................ 30
3.4.2 Econometric methodology ................................................................................................ 32
3.4.2.1 Empirical Specification and Estimation ......................................................................... 32
CHAPTER 4 ............................................................................................................................. 34
RESULTS AND DISCUSSION ................................................................................................ 34
4.1 Results ................................................................................................................................ 34
4.1.1 Descriptive Statistics Results. ........................................................................................... 34
4.1.2 Regression ....................................................................................................................... 36
4.1.2.1 Choosing Models........................................................................................................... 36
4.1.2.2 Econometric Treatment ................................................................................................. 39
4.1.2.3 Regression Results......................................................................................................... 45
4.2 Discussion........................................................................................................................... 46
CHAPTER FIVE ...................................................................................................................... 53
5. CONCLUSION AND RECOMMENDATION ...................................................................... 53
5.1 Conclusion .......................................................................................................................... 53
5.2 Recommendation ................................................................................................................ 56
RFERENCE.............................................................................................................................. 58
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List of Table
Table 1.1 List of Co mmercial Banks in Ethiopia ..................................... 4
Table 4.1 Descript ive Statist ics of Variables .......................................... 35
Table 4.2 Hausman fixed rando m test for the model ROA as a dependent
variable ................................................................................ 37
Table 4.3 Hausman fixed rando m test for the model ROE as a dependent
variable ................................................................................. 38
Table 4.4 Hausman fixed random test for the model NIM as a dependent variable .... 38
Table 4.5 Durbin–Watson d Test: Decisio n Rules .................................... 40
Table 4.6 Result on Durbin–Watson d Test: Decisio n Rules ..................... 40
Table 4.7 Variance Inflat io n Factor ....................................................... 41

Table 4.8 Model Summar y .................................................................... 44
Table 4.9 Regression on ROA, ROE and NIM Model ............................................... 45
vi
List of Figures
Figure 2.1 Schemat ic Diagram showing relationships between variables
Independent Variables.......................................................... 22
vii
CHAPTER ONE
INTRODUCTION
1.1 Back ground of the Study
Financial inst itut ions are inst itutions that provide financial service for its
clients or members. The most important financial service provided by
financial inst itut ions is rendering service as intermediaries to facilitate the
flow o f money t hrough the econo my. One of the most important financial
intermediaries is banking 1 industry.
The so lidit y and augmentatio n o f any economy to a great extent depend o n

the stabilit y o f it s bank ing sector. In other word a well-established,
responsible and profit able banking sector is better able to contribute to the
stabilit y o f the financial system in the country. If the banking industry does
not perform well, the effect to the general econo my o f the country could be
huge and broad due to the fact that banks are the crit ical part of financia l
system and play a pivotal ro le in co ntribut ing to a country’s econo mic
development (Said and Tumin, 2011).
Today, the bank performance has become a favorite subject for many
stakeho lders such as custo mers, investors, government and the genera l
public. A stable and efficient financial system r epresents efficient allocat io n
of resources and beco mes the foundat io n of rising of financial performance o f
an organizat ion which leads to achieve their ult imate object ives (Raza et al,
2011). Banks’ regulatory authorit ies are direct ly liable to evaluate the
performance o f each banking business and they should have to sense any
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origin of the word bank can be traced as Banck in German to mean joint stock fund, Banco in Italian to mean heap of money,
Banco/Banque in France to mean bench/chest a place where valuables are kept, and Bank in English as an institution money as deposit
for lending (K.P. kandasami,2003)
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future challenges regarding the performance of all banks. Therefore, beside

asked for specific statements highlight ing the performance o f financial
operation for evaluat ing banking industry, onsite inspect io n and crit ical
studies are required to find out the accuracy and to judge on the sta nd of their
performance (Iqbal, 2012).
According to previous studies, determinant s of profit abilit y are categorized

into two main groups: external and internal. The Internal determinants are
also so met imes called microecono mic determinants or inherent performance
which are specific to each bank and that, in many cases, are the direct result
of managerial decisio ns, so such management effects will d efinitely affect
the operating result of banks. External determinants, on the other hands, are
variables that reflect econo mic and legal environment which are out of the
control o f the management of the banks. They are again grouped in to two
parts as factors relat ing to the industry structure and to the macroecono mic
enviro nment within which the banking system operates.
Many studies have attempted to explain the contribut ion o f a particular

variable on the performance o f banks. It should be noted that very o ften, the
authors found different result s even contradictory Rao & Tekeste (2012),
Ameur and Mhiri (2013), Ongore and Gemechu (2013), Alper and Anbar
(2011), Athanasoglou, et. al.(2005), Alexio u and So foklis (2009), Sufian and
Chong (2008). This is mainly due to the different data they use, which covers
different areas and periods. Thus, so me authors have studied the performance
data from several countries, such as Athanasoglou et Al. (2006) Mo lyneux
&Thornton (1992), Flamini et al. (2009) and Goddard et al. (2004). And
others are studied in specific countries such as, Ameur et al. (2013), Dietrich
and Wanzenried (2011), Guru et al. (1999). This paper focused on ident ifying
explanatory factors that affect the performance o f co mmercial Banks
operating in Ethiopia.
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1.2 Background of Banking Industry in Ethiopia
The Ethiopian financial system consists o f the Nat ional Bank of Ethiopia that
is responsible to regulate the who le banking system, Co mmercial Banks
(government and do mest ic private banks), Insurance Co mpanies (government
and do mest ic private), a Public pensio n scheme, a Savings & Credit Co -
operations, Micro Finance Inst itutio ns, T-bills and bonds markets, re-
discount facilit y for government papers, int er-bank money and forex markets,
and a large number of Iqubs (Weeks et al, 2004).
Bank o f Abyssinia, the first modern bank in Ethiopia, was inaugurated on

Feb.16, 1906 fo llo wing the agreement between the Ethiopian Emperor
Minelik II and Mr.Ma Gillivray, a representat ive o f the Brit ish owned
Nat ional Bank o f Egypt. Bank of Abyssinia was formally replaced by Bank o f
Ethiopia shortly aft er Emperor Haile Selassie came to power. The new Bank,
Bank o f Ethiopia, was a purely Ethiopian financial inst itut ion and was the
first indigenous bank in Africa and established by an o fficial decree o n
August 29, 1931. During the Italian invasio n the bank was closed and several
Italian banks opened branches in Ethiopia. The State Bank o f Ethiopia was
established in 1943, after Ethiopia regains it s independence fro m fascist
Italy, and in 1963 the bank legally separated as Nat ional Bank o f Ethiopia
and Co mmercial Bank o f Ethiopia. In the period up to 1974, severa l other
state owned as well as private financial inst itutions emerged (Weeks et.al,
2004)
In 1975, fo llo wing the fall o f the imperial government, there was a major
change o f econo mic strategy in the banking sector. All privately owned banks
were nat ionalized and co ncentrated into Commercial Bank o f Ethiopia. After
the socialist regime was overthrown in 1991, the licensing and supervisio n o f
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Banking Business Proclamat io n No. 84/1994 was issued in 1994 which led to
the beginning o f a new era for Ethiopia banking sector. Immediately, aft er
the enact ment of t he proclamat ion, the private banking co mpanies re-emerged
and that leads to have 16 registered private banks and 3 public owned banks
operating in Ethiopia as o f the current year 2013 (NBE, 2013).
The Ethiopian banking structure is st ill characterized by co ncentrat ion in

terms o f ownership (do minated by the state owned banks), asset portfo lio
(largely CBE), and geographic distribut ion of financial inst itut ions (most ly in
major urban centers). It is also characterized by noticeable absence o f certain
types o f financial inst itut ions/markets such as invest ment banks, venture
capital markets, private securit ies market (corporate bonds and stocks), and
re-insurance co mpanies. The country’s financial po licy reserves the financial
sector for Ethiopian nat ionals ( Weeks et al. 2004).
Table 2.1 List of co mmercial banks in Ethio pia
No Private Co mmercial Bank Establishment Year

1 Co mmercial Bank o f Ethiopia 1963
2 Construct ion and Business Bank 1975
3 Awash Internat ional Bank 1994
4 Dashen Bank 1995
5 Abyssinia Bank 1996
6 Wegagen Bank 1997
7 Unit ed Bank 1998
8 Nib Internat io nal Bank 1999
9 Cooperative Bank o f Oro mia 2004
10 Lio n Internat ional Bank 2006
11 Oromia Internat ional Bank 2008
12 Zemen Bank 2008
13 Bunna Internat ional Bank 2009
14 Birhan Internat ional Bank 2009
15 Abay Bank 2010
16 Addis Internat ional Bank 2011
Source: (NBE, 2013)
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1.3 Statement of the Problem
To achieve the visio n o f Ethiopian growth plan to beco me a middle-inco me

level country, it is vit al for the banking industry to develop a safe, efficient
and reliable infrastructure that enhance t he effect iveness of mo netary po lic y
and broad access of financial services to the public. The banking sector is an
indispensable financial service sector supporting development p lans through
intermediat ing flow o f funds fro m those who have surplus capital to deficit
unit s and supporting financial and eco nomic government po licies. Through
loans and invest ments, banks pro mote econo mic development, job creat ion,
and easy transfer of funds between individuals or businesses. Banks are, in
effect, a communit y’s econo mic engine (Hoenig, 2010).
A sing le bank is highly connected with other banks for payment system
and/or other various funct ions. The failure of a sing le bank not only affects
it s shareho lders and depositors rather it also affects the performance o f other
banks and the who le econo my o f the country. The recent global recessio n can
be taken as an example o f eco no mic disaster that occurred by the failure o f
banking business. So, the government o f any country must have a high
concern about the performance o f banks.
Profitabilit y is crit ical for a bank to maintain cont inuing act ivit y, for its
shareho lders to acquire fair returns, and for supervisors as it guarantees to
make sound decisio n, even in t he context of a riskier business enviro nment.
Profitabilit y is a shock absorber against unexpected losses due to the fact that
it strengthens its capit al posit io n and improves future profit abilit y through
the invest ment of retained earnings.
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Profit is the essent ial prerequisit e for survival in a co mpet it ive banking
inst itut ion. Since t he basic aim o f every bank management is to maximize
profit, understanding the real factors that affect the banks performance
should be known by a concerned body. Besides making profit, a sound and
profitable banking sector is better able to withstand negat ive shocks and
contribute to the stabilit y o f the financial system. Harker and Zenio s (1998)
report shows that the bank performance is a funct ion o f it s strategic cho ices,
strategy execut ion, qualit y o f services, and the enviro nment. Accordingly,
profitabilit y difference for those banks operating in similar macroecono mic
enviro nment can be assured through t he success o f their co mpet it ive
strategies and other managerial procedure. Comparat ive advantages,
therefore, may arise fro m t he bank’s size, asset growth, and risk management
qualit y, market share, ownership structure, and concentration index. Thus,
these explanatory variables o f banks’ performance should be extracted in
empirical researches. That is why the determinants o f bank performance have
attracted the interest of academic research as well as o f bank management,
and bank supervisors.
In t his paper, bank performance, in view of pro fitabilit y, is measured by

Return on Asset, Return on Equit y and Net Interest Margin. Based on
previo us studies on the area, bank-specific, industry-specific and
microecono mic variables such as, bank size, capital adequacy, expenses
management, liquidit y risk, inco me diversificat io n, concentratio n, bank size
system, inflat ion, and eco no mic growth are incorporated.
For all t he aforement ioned reasons, like limit ed stock of knowledge o n

determinants of bank profit abilit y, the lack of consensus in t he banking
literature on the factors that affect bank profitabilit y, this study contributes
it s share to the lit erature in general and the development and growth o f the
6
banking sector of Ethiopia in particular by ident ifying the key factors that
affect the profitabilit y o f Ethiopian co mmercial banks.
So the purpose of this paper is to invest igate the effect of bank-specific,

industry specific and macroecono mic factors o n Ethiopia’s bank performance.
1.4 Research Questions
The main research quest ion is: what factors determine financial performance
of co mmercial banks in Ethiopia.
The specific quest ions are:
 What bank specific factors determine the performance of co mmercial

banks in Ethiopia?
 What industry specific factors determine the performance o f Ethiopia

commercial banks?
 What macroecono mic factors determine t he performance o f Ethiopia

commercial banks?
1.5 Objectives of the Study
General object ive:
The main object ive o f the study is to examine bank-specific, industry-

specific and macroecono mic determinants of co mmercial banks performance
in Ethiopia.
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Specific Object ives
 To examine the significance o f bank size on performance o f co mmercial

banks
 To detect the relat ionship between capit al adequacy and performance o f

commercial banks
 To ident ify the impact of operational efficiency on performance o f

commercial banks
 To invest igate liquidit y influence on the performance of co mmercial banks
 To evaluate the linkage between Loan to Deposit ratio and banks performance
 To find out the correlat ion between income diversificat ion and banks
performance
 To dist inguish the relat io n between concent ration and banks performance
 To verify the effect of bank size system o n the performance o f co mmercial

banks
 To confirm t he attachment o f inflat io n on the performance o f co mmercia l

banks
 To disco ver the effect GDP growth rate on performance of co mmercial banks
1.6 Hypothesis
H1: There is a positive significant relationship between bank size and

performance of Ethiopian commercial banks.
H2: There is a positive significant relationship between capital adequacy and

H3: There is a negative significant relationship between operational

efficiency (cost income ratio) and performance of Ethiopian commercial
banks.
8
H4: There is a negative significant relationship bet ween liquidity and

H5: There is a positive significant relationship bet ween income

diversification and performance of Ethiopian commercial banks.
H6: There is a positive significant relationship between loan deposit ratio

and performance of Ethiopian commercial banks.
H7: There is a positive significant relationship between concentration and

H8: There is a positive significant relationship between bank size system and
performance of Ethiopian commercial banks
H9: There is a negative significant relationship between inflation and

H10: There is a positive significant relationship bet ween GDP growth and
1.7 Significance of the Study
Significance o f study is an important part of t he research as it exhibits the

relevance o f the study. Ident ifying bank performance determinant factors is
vitally important for all stake ho lders, such as t he owners, the invest ors, the
debtors, the creditors and depositors, the managers o f banks, the regulators
and the government. It gives direct io n to the debtors and the investors to
make decisio n whether they should invest mo ney in bank or invest
so mewhere else. It also flashes direct ion to bank managers whether to
improve its deposit service or loan service or both to improve it s finance.
Regulatory agencies and go vernment are also interested in financial
performance for the regulat ion purposes. In general, the paper may have
important practical implicat ion for banks to find out what determinants o f
profitabilit y are crucial so that any concerned bodies can take init iat ives in
9
managing the do minant determinants. It is also used as a starting po int for

further study co nducted on banking performance wit h different technique.
1.8 Delimitation/Scope of the Study
The scope of the study is confined to all banks registered in Ethiopia as

commercial banks wit hin the study perio d. Performance of banks can be
expressed in terms o f co mpet it ion, concentratio n, efficiency, productivit y and
profitabilit y, but in this study performance is defined as profit abilit y.
Therefore, measuring performance (profitabilit y) is delimited to three
indicators- return on asset, return on equit y and net interest margin-, and ten
variables. The reason for the restrict ion o f variables to ten is that the focus o f
mo st literatures lays o n them and the availabilit y o f data, for instance, the
study excludes credit risk due to confidentialit y o f data on non performing
loan or provisio n for loan lo ss.
1.9 Organization of the Paper
This paper consists o f five chapters wit h different sect ions and sub-sect io ns,
and it was structured as fo llows. Chapter one presents the introduct ion for the
main part of the paper. Chapter Two reviews the most significant analyt ical
and empirical studies. Chapter three focuses to present the methodology o f
the study. Chapter four also provides the analysis o f result s and discussio n.
Chapter five, as usual, gives conclusio n and reco mmendat ion wit h po licy
implicat ion and further research direct ion.
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CHAPTER TWO
LITERATURE REVIEW
2.1 Analytical Literature
2.1.1 Bank performance
Better bank performance increases the reputatio n and image fro m public or
market point of view. The econo mic literature pays a great deal o f attentio n
to the performance of banks, expressed in terms of co mpet it io n,
concentratio n, efficiency, productivit y and profitabilit y (Bikker and Bos,
2006). The key driver o f banks’ performance remains earnings, efficiency,
risk-taking and leverage (ECB, 2010). A co mprehensive and co mmo nly
accepted determinant of performance for financial inst itutio ns like banks
does not exist in the literature. Instead, different researchers have attempted
to estimate empirical factors affect ing the performance o f banks using
financial data.
Bank management is mainly profit-driven. Profitabilit y is an ind icator of the

bank’s co mpet it ive posit io n in banking markets and of the qualit y o f it s
management, ensuring the healt h o f the banking system. Profit abilit y is also
considered as a bank’s first line o f defense against unexpected losses, as it
strengthens it s capital posit io n and improves future potentials through the
invest ment of retained earnings (ECB, 2010). Profitabilit y is the efficiency o f
banks at generat ing earnings which will be measured by profit abilit y rat ios
and banks, therefore, earn profit by acquiring funds at a cost fro m severs and
lending those funds to borrowers by charging customers for providing various
services (Hubbard, 2002)
11
Determinants o f bank performance are categorized as bank-specific, industry-

specific and macroecono mic factors. Bank specific indicators include: bank
size, capital adequacy, operat ional efficiency, liquidit y, loan deposit rat io,
and inco me diversificat io n. The co mmo n measure for industry-specific
representat ive used in the various studies is bank-concentration and bank size
system. The key macroecono mic variables, on the other hand, include growth
in GDP and inflat ion.
2.1.2 Bank Performance Indicators.
Bank performance proxy measures are different in various lit eratures. In most
banking literature, such as Rao & Tekeste (2012), Ongore and Gemechu
(2013), Alper and Anbar (2011), Athanasoglou, et. al., (2005), Alexiou and
Sofoklis (2009), and Sufian and Cho ng (2008), on the issue o f invest igat ing
the factors that influence t he performance of the bank are mo st commo nly
emplo yed o ne or two or all o f the three alt ernat ive measures (ROA, ROE and
NIM) were used. All t hese three standard measures o f pro fitabilit y are
considered under this study on the basis o f annual account ing data similar to
the approach fo llowed by (Ameur and Mhiri, 2013). Each rat io looks at a
slight ly different aspect of bank profit abilit y (Athanasoglou, 2006)
Return on Asset
ROA is one o f the major ratios that indicate the profitabilit y o f a bank and it
has emerged as the key rat io for the evaluation of bank profit abilit y and has
beco me the most co mmo n measure o f bank profit abilit y in the empirical
literature Rao & Tekeste (2012), Alkhat ib, (2012), Alexiou and So foklis
(2009), and Ana et. al. (2011). The ROA is defined as the rat io of net profit s
to total assets. It measures the abilit y o f a bank’s management to generate
inco me by ut ilizing the co mpany assets alt hough it may be misleading due to
off-balance-sheet act ivit ies (Athanasoglou, 2006, Dietricha and Wanzenriedb,
12
2009). In other words, it shows how efficient ly the resources of the co mpany
are used to generate profit. A higher ROA shows that the co mpany is more
efficient in using its resources.
Return on Equit y.
The other financial rat io to measure the bank performance is ROE that
reflects how much profit a bank earned compared to the total amount of
shareho lder equit y invested or found on the balance sheet and it measure s
how effect ively a bank management is using shareho lders’ funds. The ROE is
defined as the rat io of net profit s to total equit y. A business that has a hig h
return on equit y is more likely to be one that is capable o f generat ing cash
internally. Thus, the higher the ROE the more effect ive the management in
utilizing the shareho lders capital and t he better the co mpany is in terms o f
profit generat io n.
ROE is the product of ROA and assets-to-equit y rat io (equit y mult iplier that
measures financial leverage). Essent ially the ROE–ROA relat io nship clearly
illustrates the fundamental tradeo ff that banks face between risk and return,
whereas the equit y mult iplier reflects the leverage or financing po licies, i.e.
the debt-equit y proportion that the bank management used to fund the bank.
Athanassoglou, (2005) argues that an analysis based on ROE disregards the
risks associated wit h leverage, o ften a consequence o f regulat io n. On the
other hand, Staikouras and Wood (2011) emplo y ROE as an appropriate
profitabilit y measure, arguing that for many European banks the o ff-balance-
sheet business makes a significant co ntribution to total pro fit. The earnings
generated fro m these act ivit ies are excluded fro m the deno minator of ROA.
According to Rivard and Tho mas (1997), bank pro fitabilit y is best measured
by ROA for two primary reaso ns. One first reason is that ROA is not
distorted by high equit y mult ipliers and the second one is that ROA reflects a
13
better measure o f a bank’s abilit y to generate returns on its assets. Moreover,

ROA takes in to considerat ion t he disparit y in the abso lute magnitude o f the
profits that may be related to size (Guru et al, 1999).
Net Interest Margin
Finally, the NIM variable focuses on the profit earned on int erest act ivit ies.
It is defined as the net interest inco me divided by total earning assets which
contained Deposit wit h foreign Banks, Treasury Bills, Ot her
Invest ments/bonds, Sundry Debtors & Other debit balances, and Total Loans
Advances. It measures the difference between the interest inco me generated
by banks and the amount o f interest paid on borrowed funds, relat ive to the
amount of their (interest earning) assets. It means that NI M measures t he gap
between the interest inco me the bank receives on loans and securit ies and
interest cost of its borrowed funds wit h respect to the average amount of the
assets on which earned inco me is generated in that time period. While the
ROA measures the pro fit earned on assets and reflects how well bank
management uses the bank’s real invest ment resources, the NIM focuses on
the profit earned on lend ing, invest ing and funding act ivit ies. It reflects the
cost of bank intermediat io n services and the efficiency o f the bank. The
higher the net interest margin, the higher the bank's profit and the more
stable the bank is. However, a higher net interest margin could reflect riskier
lending pract ices associated wit h substant ial loan lo ss provisio ns.
The problem that may encounter on the financial rat ios particularly wit h ROA
and ROE is that the total values of assets and equit y may not remain constant
overtime, so comput ing the rat ios only by the ending balance o f total asset or
equit y may not be just ifiable. Hence, average values of consecut ive year -end
balance sheet figures are normally used to capture changes in assets during
the fiscal year. Thus, fo llowing t he footpaths of previous studies (Kosmidou,
2008; Dietrich and Wanzenried, 2009) and taking into account the
14
profitabilit y measures o f co mmercial banks used by NBE, Return on average

asset and Return on average equit y are used to measure the profit abilit y o f
the co mmercial banks in the study.
Literatures, in calculat ing ROE and ROA, differ in using pre-tax and post-tax
profits. Some st icks on before tax profit especially in the study o f cross
country banks performance/pro fitabilit y analysis due to different taxat ion
policy emplo yed in different country. However, in studies that are limit ed to
the boundaries o f one nat ion, the cho ice between pre-tax and post-tax profit s
may not be very important because all the banks will be required to pay tax
as per the country’s corporate tax law which is equally applicable to all the
banks (Guru et.al., 1999). Therefore, since the co mmercial banks operat ing in
Ethiopia are also subject to the same tax law, the profit after tax (net profit)
has been used as numerator in co mput ing the ROA.
The paper attempted to examine the impact of an extended number o f factors

that are dist inguished as internal and external determinants on banks
performance. The select ion criteria o f these variables are based on the result s
of exist ing empirically studies that shows significant influence of
performance and the availabilit y o f each variable data.
2.1.3 Bank Specific Variables
Bank Size
Bank size is measured by the natural log of total assets. Size is included in
the regressio n as a proxy o f bank size to capture the possible cost advantages
associated wit h the econo mies of scale. In the lit erature, mixed relat ionships
are found between size and pro fitabilit y. Large banks are likely to have an
advantage o f engaging in higher invest ment diversificat ion than small banks.
15
Since this diversificat ion reduces risks and econo mies of scale lead to
increase operat ional efficiency t hrough minimizing costs, posit ive
relat io nship is expected between bank size and profit abilit y (Rao & Tekeste,
2012 and Alper and Anbar, 2011. On the other hand, in the diversificat ion o f
bank branches, for instant, the operational expense may get higher and the
variable ma y exhibit negat ive effects Ameur and Mhiri, 2013 and Sufian and
Chong, 2008. The impact of bank size on its pro fitabilit y cannot be
theoretically ant icipated (Ongore, and Kusa, 2013; Dietricha and
Wanzenriedb, 2009). Hence, the expected sign o f the coefficient of bank size
is unpredictable based o n academic lit erature. This analysis used the
logarithm o f total asset to capture the potent ial non-linear effect of size
similar to Athanasoglou et al. (2008) Alexio u and So foklis (2009).
Capital Adequacy (CAR)
Capital adequacy (Equit y-Asset Rat io) reflects the capit al strength or capital
structure of a bank. It is one of the bank specific factors that influence the
level of bank profit abilit y. Strong capital adequacy rat io shows the internal
strength o f the bank to withstand lo sses during crisis and it increases safet y
for depositors during unstable macroecono mic condit io ns. Large size o f
equit y is expected to reduce the bank risk and increases a bank’s
creditworthiness in reducing it s fund ing cost for a bank wit h higher equit y to
assets rat ios will normally have a lower need o f external funding. However,
lower capit al rat ios in banking imply higher leverage and risk, which
therefore lead to greater borrowing costs. CAR variable is included in the
regressio ns to examine the link between profit abilit y and bank capitalizat ion
(Dietricha and Wanzenriedb, 2009). Most literatures result s show that it has
posit ive relat io nship wit h pro fitabilit y (Rao & Tekeste, 2012; Ameur and
Mhiri, 2013; Ongore and Gemechu, 2013; Athanasoglou, et. al., 2005; and
Sufian and Chong, 2008. On the co ntrary, some like Ayanda et. al. (2013)
16
revealed negat ive relat ions. Especially against ROE, it is expected to have a
negat ive relat io nship due to dilut io n effect.
Operat ional Efficiency
Cost Inco me Rat io (CIR) reflect bank’s operational efficiency and it is

defined as non int erest costs (operating cost, such as administrative costs,
staff salaries and property costs excluding bad debts and doubtful expenses)
divided by total o f int erest inco me and non-interest inco me (Dietricha and
Wanzenriedb, 2009). CIR depicts the cost incurred per inco me generated. The
study, therefore, used this variable to measure the impact of operatio nal
efficiency on bank pro fitabilit y. CIR used as an indicator of management’s
abilit y to control costs and is expected to have a negat ive relat ion wit h
profits, since improved management of these expenses will increase
efficiency and therefore raise profit s (Guru et al. 2002). According to
Athanasoglou et al. (2005) invest igat io n on Greek banks during the period
1985 – 2001 observed that Operating expenses appear to be an important
determinant of profit abilit y. There is negative connect ion between operat ing
expenses and profitabilit y o f banks; means that there is immed iate negat ive
relat io n between lack of efficiency in expenses management and profitabilit y
of banks. The study revealed that efficient expenses management was one o f
the most significant in explaining high bank profitabilit y (Guru et al., 1999).
Liquidit y Risk
Liquidit y is measured by liquid asset to total asset ratio. Since insufficient

liquidit y is one o f the major reasons of bank failures, in addit io n to the
maint enance of cash reserve wit h the Central Bank, the co mmercial banks are
also required to keep up a minimum level o f liquid assets. Co mmercial banks
may co nfro nt with liquidit y deficit, when the y face a problem o f meet ing a
large amount of demand (wit hdrawals). In such a situat io n, banks may be
17
forced to raise addit io nal liquid funds by borrowings or disposing so me o f

their liquid assets. Usually, short -term borrowings are cost ly and the lo ss o f
inco me fro m the sale o f liquid assets will tend to have an adverse effect on
profitabilit y. On the other hand, idle funds and the lower returns o n liquid
assets may also adversely affect the profitabilit y o f those banks wit h surplus
liquidit y. Therefore, liquidit y may have a posit ive or a negat ive effect, and
it s management represents yet another imp ortant determinant o f co mmercial
bank profitabilit y (Rasiah, 2010).
Inco me diversificat ion (DIV)
Non-interest inco me is other alternat ive means o f inco me other than earning
fro m loans. Banks generate inco me fro m off-balance sheet such as fro m
letters of credit and this non-interest inco me would represent a key source of
bank revenue (Rasiah, 2010). Thus, the ratio o f no n-interest inco me o ver
average assets is entered in the regressio n analysis as a proxy measure o f
inco me diversificat ion onto non-tradit io nal act ivit ies. Non-interest inco me
consists o f service charges, commissio n, guarantee fees, net profit fro m sale
of invest ment securit ies, and foreign exchange pro fit. Thus, Bankers have
found a pro mising channel for boosting the inco me statement by diversifying
their inco me sources. The variable is expected to exhibit posit ive relat io nship
with bank profitabilit y.
Loan to Deposit Ratio (LDR)
Loans are the most important indicators of banks performance in t he bank

financial statements because they reflect the bank's primary act ivit y.
Assumed, other variables constant, the higher the rate of transforming
deposits into loans, the higher the pro fitabilit y will be. For that, a posit ive
relat io nship between loan deposit ratio and banks pro fitabilit y is expected.
On the other hand, if increasing loans leads to higher funding requirements, a
18
negat ive impact of the loan rat io on the banks profitabilit y may accrue
Alexiou and So foklis (2009) and Ana et. Al.(2011).
2.1.4 Industry Specific Determinants
Concentrat ion (HHI)
It measures the market structure in the banking industry by means o f the bank
concentratio n variable. Market concentration is measured by using the
Herfindahl-Hirschman (H-H) index (Athanasoglou et al., 2005) or the rat io o f
the three largest banks’ assets to the total assets o f the ent ire banking sector.
In this study market concentrat ion is measured like the previous researcher
(Athanasoglou et al., 2005) by using the Herfindahl-Hirschman (H-H) index,
which is the sum of the squares o f market share of the sample banks inc luded
in this particular study. The high concentratio n rat io in the market creates
greater than average efficiency in these markets yielding a posit ive pro fit
concentratio n relat io nship (Berger, and Hannan, 1989). In Ethiopia banking
business environment study conducted by (Belayneh, 2011) indicated that the
existence o f negat ive and significant relatio nship between the declining
market concentration and Ethiopian co mmercial banks pro fitabilit y. it is
expected that a higher bank concentratio n has a posit ive impact on
profitabilit y. On the other hand, a higher bank concentration might be the
result of a tougher compet it ion in the banking industry, which would suggest
a negat ive relat io nship between performance and market concentration. As a
result, the overall effect of market concentration on banking performance is
again indeterminate.
Size Bank System (SBS): reflect the importance o f bank financing in the
econo my and it is measured by t he rat io of total assets o f banks to GDP.
Regarding to the bank size system, Demerguç-Kunt and Huizingha (1999)
19
provide the evidence that small size bank system allow to high margins and
profits, when they explore the bank profitabilit y o f 80 countries over the
1988-1995 period. As well, BenNaceur (2003), reports that the growth of
bank system does not necessary contribute to improve pro fitabilit y o f the
banking sector in Tunisia.
2.1.5 Macroeconomic Determinants
GDP - is used to account for econo mic environment and it is measured by

real GDP growth. GDP growth varies over time but not among the banks.
GDP growth is expected to have a positive impact on bank pro fitabilit y
according to the literature on the associat ion between econo mic growth and
financial sector profitabilit y (Demirguc-Kunt and Huizinga, 1999; Bikker,
and Bos, 2006; At hanasoglou et al., 2006). Accordingly, we expect a posit ive
relat io nship between bank pro fitabilit y and GDP development as the demand
for lending is increasing (decreasing) in cyclical upswings (downswings).
However, BenNaceur and Goaid, (2005) suggest that GDP growth does not
tell any characterist ic of the banking regulation and the advanced techno log y
in t he banking sector. By the other side, Staikouras and Wood (2003) find
two of their t hree macroecono mic indicators, the variabilit y o f interest rate
and the growth o f GDP, have a negat ive impact, while the level o f interest
rate have a posit ive effect on bank performance.
Inflat ion (INF): is also one o f the microeconomic determinants and used to
represent the changes in t he general price level or inflat io nary co ndit io ns in
the econo my and it is measured by annual country inflat io n rate. Abreu and
Mendes (2000), point out a negat ive relat ionship between the inflat ion rate
and bank’s pro fitabilit y in European countries. Likewise Ayadi and
Boujelbene (2012), report a negat ive effect o f inflat io n on Tunisian bank
profitabilit y o ver the 1995- 2005 period. In t he same way, Demirguc-Kunt
20
and Huizinga (1999) suggest that banks wit h high capital rat io in developing
countries tend to be less pro fitable in inflat ionary enviro nments.
Conceptual Framework
The conceptual schema o f t he relat io n between the independent variables and

dependent variable dist illed fro m t he lit erature review is shown on figure 2.1
below. It assumes that the relat io nship between t he independent variable and
dependent variables is linear.
Figure 2.1: Schemat ic Diagram showing relatio nships between variables
Independent Variables
INDEPENDENT VARIABLES INDEPENDENT

Bank-specific Factors VARIABLES
Bank Size
Industry Specific
Capital adequacy Factors
DEPENDENT VARIABLES
Bank Concentration
Bank Performance
Operational efficiency
Size Bank System
Return on Asset
Liquidity Risk
Return on Equity INDEPENDENT

VARIABLES
Income diversification
Net Interest Margin Macroeconomic

Loan to Deposit Ratio Factors
Real GDP Growth
Annual Inflation
Rate
21
2.2 Empirical Literature
Rao & Tekeste (2012), conducted the research on the topic “Determinants o f
Profitabilit y o f Co mmercial Banks in a Developing Country: Evidence fro m
Ethiopia” emplo ying unbalanced panel data of Ethiopian co mmercial banks
under the period 1999/00 to 2008/09. In the study return on average asset
stands for bank profit abilit y ind icators, seven int ernal and t hree external
factors were regressed against ROA o f the banks. The finding o f the study
shows that the most important determinants o f banks’ profitabilit y in
Ethiopia are all the int ernal factors used in the study: equit y to asset ratio,
non-int erest inco me to total inco me and bank size have posit ive and
significant impact on the profitabilit y, the loan lo ss reserve to total loans is
found to have negat ive impact on profit abilit y though it is statist ically
insignificant, liquidit y and operat ional efficiency are also negat ively affect
the profitabilit y o f the banks. But the external factors (concentratio n,
inflat io n and GDP) are found to be stat istically insignificant . My study is
different fro m the above one since it ut ilized a time period o f 2003-2012.
Kapur and Abebaw (2012), conduct an empirical analysis on the impact of

ownership structure on the performance of Ethiopian co mmercial banks wit h
the sample o f two public co mmercial banks and six private co mmercial banks
under the period 2001 to 2008. To examine the relat ionship and to determine
the different attribut io ns o f performance in their ownership patterns, the
study used both parametric and nonparametric tests. The findings show that
private sector banks had better profit abilit y as measured by ROA and NIM
than their public counterparts. The researchers, then, concluded that private
sector banks are better in ut ilizat ion of assets effect ively and in generat ing
profits fro m interest earning invest ments. In addit io n to profitabilit y, private
sector banks were significant ly better in credit management, which
demo nstrates the efficiency in evaluat ing and deplo ying resources in good
projects, than public owned banks. Capit al adequacy that refers to the ratio of
22
capital to net loans (in this part icular study) is also significant ly better in
private sectors showing the abilit y o f private banks in meet ing un-expected
operational losses. On the other hand public banks were significant ly better
in cost management measures as t hey are able to keep the proportion o f costs
to assets lower t han that of private sector banks. Besides in managing
noninterest expenses and general and staff expenses Public sector banks were
better than private one. However, in terms o f liquidit y, no difference was
observed between the private and public sector banks. My study is different
fro m the study by Kapur and Abebaw since it utilized a t ime period o f 2003 -
2012 and considered 100% of the populat ion.
The paper conducted by Ameur and Mhiri (2013), to ident ify the explanatory
factors of banks’ Performance on ten Tunisian co mmercial banks fro m 1998
to 2011 incorporate bank-specific, industry-specific and macroecono mic
factors. The empirical result o f t he GMM est imator technique shows a hig h
degree o f persistence of bank performance. Thus, the findings suggest that
the bank capitalizat ion and the best managerial efficiency have a posit ive and
significant effect on the Tunisian bank performance. However, concentratio n
and bank size have negat ive a negat ive and a significant effect on
performance. On the other hand, the macroecono mic variables do not have a
significant effect on bank performance, except inflat ion which seems to
affect negat ively bank’s net interest margin. Moreover, private owned banks
seem to be more profitable than state owned ones.
Ongore and Gemechu (2013), used linear mult iple regressio n model and
Generalized Least Square on panel data to estimate the determinants of
financial performance o f co mmercial banks in Kenya. Their finding reveals
that specific factors such as capit al adequacy, asset qualit y and management
efficiency significant ly affect the performance o f Kenyan co mmercial banks,
except for liquidit y variable. The relat io nship between bank performance and
23
capital adequacy and management efficiency was found to be posit ive and for
asset qualit y the relat ionship was negative. But the overall effect o f
macroecono mic variables was inconclusive and the role of ownership ident it y
on the financial performance o f co mmercial banks was insignificant. Even if
it is found that GDP has negat ive correlat ion wit h performance indicators, the
relat io nship is insignificant.
Azam and Siddiqui (2012), applied mult iple regressio n technique to analyze
the internal and the external determinants o f Pakistan banking industry. The
study, on t he purpose o f co mparing the profitabilit y o f do mest ic and foreign
banks and analyzing t heir determinants under the period 2004 to 2010 (on
quarterly basis), find t hat foreign banks are more profitable than all do mest ic
banks, and they have also different profitabilit y determinants. Empirical
results show that foreign banks are less affected by the macroecono mic
factors of the host country than do mest ic banks and they have a higher
profitabilit y margin in Pakistan. They conclude that local controlled
commercial banks in Pakistan are more profitable than foreign controlled
ones as far as the vo lume o f the pro fit is concerned which is reflected in their
earnings per share but the foreign co ntrolled co mmercial banks in Pakistan,
as a who le are more capital efficient as compared to the local controlled
commercial banks subject to few except ions.
Alkhat ib, (2012), with the purpose to empirically examine the financial
performance o f five Palest inian co mmercial banks listed o n Palest ine
securit ies exchange. In this paper, Financial performance has been measured
by using three indicators; Internal–based performance measured by Return on
Assets, Market-based performance measured by Tobin’s Q model (Price /
Book value o f Equit y) and Econo mic–based performance measured by
Economic Value add. The study emplo yed the correlat ion and mult iple
regressio n analysis o f annual t ime series data fro m 2005-2010 to capture the
24
impact of bank size, credit risk, operational efficiency and ass et management
on financial performance measured by t he three indicators, and to create a
good-fit regressio n model to predict the future financial performance o f these
banks. The finding implies that operational efficiency and asset management
individually have significant impact on ROA, when they used alo ng wit h
bank size and credit risk, they add significant effect on Tobin’s Q and EVA.
San1 and Heng (2013), conducted the study aims to invest igate the impact of
bank-specific factors which include the liquidit y, credit, cap ital, operat ing
expenses and the size o f co mmercial banks on their performance, which is
measured by return on average assets (ROAA) and return on average equit y
(ROAE). The result s imply t hat rat ios emplo yed in t his study have different
effects on the performance of banks in both China and Malaysia, except
credit and capital rat ios. Operat ing rat ios influence performance o f banks in
China, but this influence is not true for Malaysian banks regardless o f the
measure o f performance.
The study o f Alper and Anbar (2011) focuses on the bank specific and
macroecono mic determinants o f Pro fitabilit y in Co mmercial Bank o f Turke y
under the period 2002 to 2010. It uses ROA and ROE as dependent variables
to examine the determinant o f banks profitabilit y. The finding t he research
reveals that asset size and non-int erest income have a posit ive and significant
effect on bank profit abilit y. However, size of credit portfo lio and loans under
fo llow-up have a negat ive and significant impact on bank profit a bilit y. Wit h
regard to macroecono mic variables, only the real interest rate affects the
performance o f banks posit ively. These results suggest that banks can
improve their pro fitabilit y through increasing bank size and non-interest
inco me, decreasing credit/asset ratio. In addit io n, higher real interest rate can
lead to higher bank profit abilit y.
25
The Greek banks working paper invest igates the bank-Specific, industry-
specific and macroecono mic determinants of pro fitabilit y by using GMM
technique to a panel data over the period 1985 to 2001 (Athanasoglou, et. al.,
2005). In the study the pro fitabilit y indicator is measured by two alternat ive
as a dependent variables i.e. the ratio of profits to assets (ROA) and the
profits to equit y rat io (ROE).The results show that all bank-specific
determinants, except size, affect bank profitabilit y significant ly as capit al
and labor productivit y posit ive and operating expenses negat ive impact on
profitabilit y. The macroecono mic determinants: inflat ion and cyclical output
also clearly affect the performance o f the banking sector. Moreover, the
industry specific factors: ownership and industry co ncentratio n are found
insignificant. The effect of the business cycle is posit ively correlated to
profitabilit y o nly when output is abo ve its trend. Even if t his empirical
framework incorporates the tradit ional Structure-Conduct- Performance
(SCP) hypothesis, no evidence is found in support of t he SCP hypothesis as
the effect of industry concentration on bank profitabilit y was found
insignificant.
Other similar study on Greek banks was conducted by Alexio u and Sofoklis
(2009) to examine the effects of bank-specific and macroecono mic
determinants of Greek bank pro fitabilit y, by assuming that the two broad sets
of variables (ROA and ROE) that control bank profitabilit y are a funct io n of
the specific sector as a who le as w ell as the macroecono mic environment
within which the sector operates. A panel data approach was applied to six
Greek banks using an empirical framework that incorporates the tradit io nal
Structure-Conduct- Performance (SCP) hyp othesis. The finding suggests that
mo st of the bank-specific determinant s were significant ly affect bank
profitabilit y. However, there is relat ively weak relat io nship between size and
profitabilit y, and ambiguous picture were considered on macroecono mic
factors.
26
Sufian and Cho ng (2008), look for the factors that influence the profit abilit y
of Philippines banking sector by using ROA as a dependent variables during
the period 1990–2005. The empir ical evidences suggest that all the bank-
specific determinant variables have a statist ically significant ly impact on
bank pro fitabilit y. Amo ng them size, credit risk, and overhead expensed are
negat ively affect the bank profitabilit y, whereas non-int erest inco me and
capitalizat ion have a posit ive impact on it. Concerning the macroecono mic
factors, the findings show that except inflation which has a negat ive impact
on bank pro fitabilit y, GDP, the growth in mo ney supply, and the level o f
stock market capitalizat ion have not significant ly explained the profitabilit y
of Philippines banks.
Ana et. Al. (2011) conduct research on the topic Determinants o f Bank
Profitabilit y in Croatia wit h two fo ld objectives; to provide a synt hesis o f
relevant empirical researches on t he determinants o f co mmercial banks’
profitabilit y and to establish empirical verificat ion of pro fitabilit y
determinants o f Croatian banks using dynamic panel analysis under the stud y
period 2003 to 2008 on 28 co mmercial banks. Return o n assets (ROA) is used
as a proxy indicator to measure pro fitabilit y in t he analysis. The re sult o f the
study reveals that higher lo an growth and equit y financing, stable base o f
deponents, prudent credit risk and market risk management as well as the
growth o f fee based act ivit ies are co mparat ive advantages of banks in Croatia
in achieving extraordinary levels o f return on assets. On the other hand, the
average interest inco me and t he average interest expense proved to be
statist ically insignificant.
Ayanda et. al. (2013) search for the determinant of Nigerian Banks’
Profitabilit y in the case o f First Bank of Nigeria Plc by applying the
econo metric analysis o f Co-integratio n and Error Correction Technique using
annual t ime series data fro m 1980 to 2010. The empirical result shows that
bank size and cost efficiency did not significant ly determine bank
27
profitabilit y in Nigeria. However, credit risk and capital adequacy had

significant ly negat ive effect on banks pro fit abilit y both in t he lo ng-run and in
the short run. Liquidit y Risk which is, in the study, measured by Total Loans-
to-Total Assets ratio and Total Loans-to-Total Bank Deposits rat io have
significant negat ive and posit ive relat io nships wit h pro fitabilit y respect ively
only in the short run. On the other hand amo ng macroecono mic variables
used in the study only mo ney supply growth had a posit ively link wit h
Nigerian bank pro fitabilit y both in the lo ng run and in t he short run.
However, no evidence was found for inflation rate and growth rate of real
GDP determinat ion o f profit abilit y.
28
CHAPTER THREE
Research Design and Methodology
3.1 Research design
The object ive o f the study is to invest igate the determinants o f co mmercia l
banks’ performance in Ethiopian banking industry. Fixed effects, and rando m
effects model were used aft er testing the valid it y o f the assumpt ion o f the
models by using the Hausman test for each t hree mo dels (Brooks, 2008) by
incorporating banks specific, industry specific and macroecono mic variables
for t ime period o f 10 years (2003 to 2012) on sixteen Ethiopian co mmercial
banks.
3.2 Sample and Sampling Techniques
To detect the factors that affect the Ethiopian co mmercial banks performance,
all co mmercial banks operat ing in Ethiopia are the populat ion for the study.
According to the Natio nal bank o f Et hiopia, there are 19 licensed banks in
the country. Development Bank o f Ethio pia is out of co mmercial banks
category because its missio n is different from the co nvent ional co mmercia l
banks. Thus fro m the remaining 18 co mmercial banks , Debub Glo bal Bank
and Enat Bank were excluded since there are new and have no data for the
year 2012. Thus, the research includes all co mmercial banks operating in
Ethiopia who have reported financial data up to the end o f June 2012. This
means that the study covers 100% o f the populat ion (co mmercial banks in
Ethiopia) which are operat ing full years in the study period. Therefore, the
study has a time series segment spanning fro m the period 2003 up to 2012
and a cross sect ion segment which considered sixt een Ethiopian co mmercia l
Banks wit h unbalanced data of 111 observatio ns.
29
3.3 Source and Tools/Instruments of Data Collection
The study used seco ndary data to invest igate the bank specific, industry
specific and macroecono mic determinant s o f the bank performance in
Ethiopian co mmercial banks. Therefore, both the annual audited financial
statements of the who le banks, which are conso lidated on July 30 of each
year and calculated in Ethiopian Birr, and the macroecono mic variables, were
gathered fro m Nat ional Bank of Ethiopia.
3.4 Methods of Data Analysis
Quant itative met hods of data analysis can be o f great value to the researcher
who is attempt ing to draw meaningful result s on determinant factors on any
subject area fro m a large body of data. Since quant itat ive data analysis
methods have taken full advantage o f user-friendly statist ical packages such
as, Eviews, SAS, SPSS and Stata, this study emplo yed Stata for reporting the
summary result s in numerical terms wit h a specified degree of confidence.
3.4.1 Panel Data
Generally three types o f data that are available for empirical analysis: (1)
cross sect io n, (2) time series, and (3) pooled data (Gujarat i, 2004). Time
series data, as the name suggests, are data that have been co llected over a
period o f t ime o n one or more variables. Cross-sect io nal data are data on one
or more variables co llected at a single point in t ime. Panel data have the
dimensio ns o f both time series and cross-sectio ns (Brooks, C. 2008).
The term panel data refers to the pooling of observat io ns of separate unit s
(countries, banks, groups of people etc.) on the same set of variables over
several t ime periods. Thus, the panel data analysis was adopted for
30
conduct ing our econo metric modeling. Panel data are a special t ype of pooled
data and it consists o f observat io ns o n the same cross-sect ional or individual
unit s over several t ime periods. Panel data have, therefore, space as well as
time dimensio ns. Using the panel data has several benefits alo ng wit h certain
limitat io ns as well. So me o f the Panel data techniques advantage over cross-
sect ion or time series data are panel data can take heterogeneit y explicit ly
into account by allo wing for individual-specific variables, give more
informat ive data, more variabilit y, less co-linearit y amo ng variables, more
degrees of freedo m and more efficiency. Panel data can capture and measure
effects that are not detectable in cross-sect ion time-series analysis, as well as
provide a plat form on which to test more co mplicated behavioral models
(Gujarat i, 2004). Panel data can be classified as balanced and unbalanced
data sets. In this research unbalanced panel used because each cross-sect ional
unit o f the study does not have the same number of time series observat io ns
due to difference in their date of establishment to absorb 10 years o f data.
The most co mmo n technique in the literature is the Fixed Effects (FE) model.
If it is assumed that εi and the X’s are uncorrelated, Rando m Effect (RE)
model may be appropriate, whereas if εi and the X’s are correlated, FE ma y
be appropriate. The FE model assumes that the marginal effects of t he
explanatory variables on t he dependent unit are the same for all units (i.e.
firms). The co nstant term is allowed to vary amo ng the units to account for
the differences between units. It has also been shown that the FE est imator is
consistent even when the RE model is valid or even if the t ime-invariant
component of the error term is correlated with the regressors (John ston and
Dinardo, 1997; Nguyen, J., 2006). As Gugarati (2004) cited Wooldridge who
contends that in many applicat io ns, the whole reason for using panel data is
to allow the unobserved effect [i.e., εi] to be correlated wit h the explanatory
variables. Moreover, Brooks (2008) said that the rando m effects model is
more appropriate when the ent it ies in t he sample can be thought of as having
been rando mly selected fro m the populat ion, but a fixed effect model is more
31
plausible when the ent it ies in the samp le effect ively const itute the ent ire
populat ion. Therefore, given the above contentio n and the who le populat io n
are considered in t his specific study, the fixed effects est imates would be the
reference po int in the study and then the discussio n focuses on the result s o f
the fixed effect model (ROA model).
3.4.2 Econometric methodology
3.4.2.1 Empirical Specification and Estimation
In this sect io n, the met hodology adopted for the emp irical analysis to
recognize t he determinants o f performance in Ethiopian bank is introduced.
Accordingly, there is a need to estimate a relat ionship o f the fo llowing for m
using the panel data consist ing o f sixt een banks’ data across a period fro m
2003 to 2012. The model quest ion is
Y it = α + βX it + ε i t ………………………….…………….…. (1)
Where, α represents the intercept, β 1 , β 2 … β n represent the respect ive

regressio n coefficients for explanatory variables X 1 , X 2 …X n for est imat ing
Y it , the equat ion, then, can be written as;
Y it = α i + β 1 BS it + β 1 IndS i t + β 2 Macro it + ε it ………………. (2)
Where, Y it is an index o f Performance represented by ROA, ROE and NIM,

BS is vector of bank specific variables, IndS is vector of industry specific
variables and Macro is vector of macroecono mic variables t hat are believed
to determine the level o f performance. While α i is unobserved macro,
industry and bank specific t ime; invariant effect which allows for
heterogeneit y in the means o f the Y it series across banks and ε is the error
term.
32
Then, the equat io n would be;
ROA Model: - Return on Average Assets as dependant variable
ROA i ,t = α + β 1 SIZE i,t + β 2 CAR i, t + β 3 CIR i, t + β 4 LIQ i ,t + β 5 DIV i, t + β 6 LDR i ,t +

β 7 HHI t + β 8 SBS t + β 9 INF t + β 9 GDP t + ε i, t… ……… …… …… …… ……… …… …… … (3)
ROE Model: - Return on Average Equit y as dependant variable
ROE i, t = α + β 1 SIZE i ,t + β 2 CAR i, t + β 3 CIR i ,t + β 4 LIQ i ,t + β 5 DIV i, t + β 6 LDR i, t +

β 7 HHI i, t + β 8 SBS i ,t + β 9 INF i, t + β 9 GDP i ,t + ε i,t …… ……… …… …… …… …… ……… …… (4)
NIM Model: - Net Interest Margin as dependant variable
NIM i, t = α + β 1 SIZE i ,t + β 2 CAR i ,t + β 3 CIR i, t + β 4 LIQ i, t + β 5 DIV i, t + β 6 LDR i, t +

β 7 HHI i, t + β 8 SBS i ,t + β 9 INF i, t + β 9 GDP i ,t + ε i,t ……………………………….(5)
Where
ROA i ,t = Return on Average Asset for bank i at time t
ROE i, t = Return on Average Equit y for bank i at time t
NIM i, t = Net Interest Margin for bank i at time t
SIZE i,t = The natural logarit hm o f total asset for bank i at time t
CAR i,t = Capital strength for bank i at time t
CIR i ,t = Cost to inco me rat io for bank i at time t
DIV i,t = Inco me diversificat ion for bank i at time t
LIQ i ,t = Liquid it y risk for bank i at time t
LDR i, t = Loan Deposit Rat io for bank i at time t
HHI t = Industry concentration at time t
SBS t = Size Bank System at time t
GDP t , = Real GDP growth at time t
INF t = Inflat ion rate at time t
ε i = the error term
33
CHAPTER 4
RESULTS AND DISCUSSION
4.1 Results
This chapter provides empirical evidence on the determinants of bank

profitabilit y in t he Ethiopian Banking industry. The sect ion has two parts: the
result of descript ive stat ist ics and the regressio n of the three models. At the
first part a broad descript io n of the characterist ics o f the variables used in the
study is given in Table 1, which reports their statist ical means, standard
deviat ion, minimal and maximal level. Secondly the result o f the regressio n
for the return on asset, return on equit y and net interest margin are stated in
the consecut ive tables.
4.1.1 Descriptive Statistics Results.
This part presents the outcomes o f the descript ive statist ics for main
variables invo lved in the regressio n mo del. I introduce summary stat ist ics for
all variables in Table 4.1. The key figures; including mean and standard
deviat ion wit h minimum and maximum value were reported. This was
generated to give overall descript io n about data used in the model.
34
Table 4.1 Descript ive Statist ics of Variables
Variables Obs Mean Std. Dev. Min Max
Dependent roa 111 2.483216 1.771959 -3.952926 6.717239

Variables
roe 111 22.84898 14.82329 -20.20195 77.70969
nim 111 4.276335 1.754202 .509554 10.78294
Bank Specific size 111 7.997515 1.337425 4.859812 11.97543

Factors
car 111 .1568205 .1086271 .042525 .768217
cir 111 48.10494 50.40102 13.46144 441.9355
liq 111 41.36666 11.24477 15.80594 93.79845
div 111 3.980383 1.971953 .031008 13.5371
ldr 111 67.64045 19.67331 20 129.5918
Industry Specific hhi 111 .5158196 .0744845 .429344 .67345

Factors
sbs 111 .0180599 .0063668 .011313 .029932
Macroecono mic inf 111 17.96772 11.63648 2.8 36.4

Specific Factors
gdp 111 .0992781 .0372754 -.021611 .135724
Source: Computed by using Stata
As shown in t he Table 4.1, the descript ive statist ics o f the study, there are
111 observat io ns due to unbalanced data collected fro m sixteen co mmercia l
banks over the period 2003 to 2012. The mean for ROA, ROE and NIM are
2.483216, 22.84898 and 4.276335 percent, and the standard deviat io ns are
1.771959, 14.82329 and 1.754202 percent respect ively wit h a minimum of -
3.952926, -20.20195 and 0.509554 percent, and a maximum o f 6.717239,
77.70969 and 10.78294 percent respect ively.
There are 10 independent variables used in this study. A natural log o f total
asset of t he bank is used to represent the size o f the bank wit h it s mean and
35
standard deviat io n o f 7.997515 and 1.337425 respect ively. The mean and
standard deviat ion o f Equit y to Total Assets ratio (CAR) are .1568205 and
.1086271 respect ively. Cost to Income ratio (CIR) which indicates the
efficiency of expense management also obtained a mean of 48.10494 and a
standard deviat ion o f 50.40102. The liquidit y aspect of the banks which
measured as Liquid Assets to Total Deposit s (LIQ) has a mean 41.36666 and
a standard deviat io n o f 11.24477. The loan deposit rat io and diversificat io n
also shows a mean o f 67.64045 and 3.980383, and a standard deviat io n o f
19.67331 and 1.971953. Concerning industry specific ind icators the mean and
standard deviat ion o f concentrat ion (HHI) are .5158196 and, .0744845, and
that of bank size system is the mean o f .0180599 and a standard deviat ion o f
.0063668. For macroecono mic variables, the mean o f GDP and INF are
.0992781 and 17.96772 respect ively. The standard deviat ion o f GDP and INF
are .0372754 and 11.63648 respect ively.
4.1.2 Regression
This sect ion presents over all the emp irical results o f the regressio ns analysis
for banks pro fitabilit y which is measured by return on asset, return on equit y,
and net interest margin. They have been regressed to understand t he bank
specific, industry specific and macroeconomic determinants.
4.1.2.1 Choosing Models
There are broadly two classes o f panel data est imator approaches that can be
emplo yed in empirical research: fixed effects models and rando m effects
models. Before starting regressio n analyses to examine the relat io nship
between bank performance measures and independent variables, it has to be
decided that whether fixed or rando m effect is appropriate to the specific
36
model used. Therefore; the first issue is that choosing between fixed effects
(FE) and a rando m effects (RE) model based on the Hausman test where the
null hypothesis says that rando m effects model is appropriate than the fixed
effects model.
Table 4.2 Hausman fixed rando m test for the model ROA as a dependent
variable
Coefficients
(b) (B) (b-B) sqrt(diag(V_b-V_B))
fixed random Difference S.E.
size 1.150847 .5158086 .6350386 .4844933

car 6.030426 2.394601 3.635825 1.335033
cir -.0109829 -.0165184 .0055355 .0018918
liq -.0428816 .0056993 -.0485809 .0066105
div .8192006 .4336048 .3855959 .0958114
ldr -.018925 .0126878 -.0316128 .0080801
hhi 5.801168 2.918108 2.88306 1.528746
sbs -119.3277 .2157967 -119.5435 41.16126
inf .0185065 .0042562 .0142503 .
gdp 3.476329 5.419356 -1.943027 .
b = consistent under Ho and Ha; obtained from xtreg

B = inconsistent under Ha, efficient under Ho; obtained from xtreg
Test: Ho: difference in coefficients not systematic
chi2(7) = (b-B)'[(V_b-V_B)^(-1)](b-B)
= 30.89
Prob>chi2 = 0.0001
According to Chris brooks (2008), if the p-value for the Hausman test is less
than 1%, indicat ing that the rando m effects model is not appropriate and that
the fixed effects specificat ion is to be preferred. Based on this fact, , p-value
for the Hausman test was 0.001, i.e. less than 1%, so running fixed effect
model is appropriate.
37
Table 4.3 Hausman fixed rando m test for the model ROE as a dependent
variable
Coefficients
fixed random Difference S.E.
size 9.633509 9.751418 -.117909 4.586275

car 1.620728 -8.531263 10.15199 14.94111
cir .0254741 .0194912 .0059829 .0250004
liq -.0959691 -.0045314 -.0914378 .0973301
div 4.611166 2.58318 2.027987 .9473185
ldr .1398179 .1606946 -.0208766 .0892555
hhi 44.15911 37.68209 6.477022 16.64158
sbs -276.8579 -98.13226 -178.7256 405.2326
inf .0208763 -.0553429 .0762191 .0352172
gdp 39.04426 43.04849 -4.004226 .

chi2(6) = (b-B)'[(V_b-V_B)^(-1)](b-B)
= 1.89
Prob>chi2 = 0.9293
According to Hausman test hypothesis if the p-value is greater than 1%,

indicat ing that the rando m effects model is preferred to fixed effect
specificat ion.
Table 4.4 Hausman fixed rando m test for the model NIM as a dependent
variable
Coefficients
fixednim randomnim Difference S.E.
size 1.970114 .5669467 1.403167 .5339997

car 9.130627 6.590998 2.539629 .5301938
cir -.0011558 -.0061835 .0050277 .0003
liq -.0430998 -.0175672 -.0255327 .
div .0478133 -.0392838 .0870971 .0769926
ldr -.0334709 -.0180047 -.0154662 .
hhi 5.21051 .0652253 5.145285 1.780029
sbs -219.7433 -73.48826 -146.255 42.43996
inf .0403584 .0373781 .0029803 .
gdp 1.846838 3.565032 -1.718194 .

chi2(7) = (b-B)'[(V_b-V_B)^(-1)](b-B)
= 6.31
Prob>chi2 = 0.5035
According to Hausman test hypothesis if t he p-value is greater than 1%,

indicat ing that the rando m effects model is preferred to fixed effect
specificat ion.
38
4.1.2.2 Econometric Treatment
In order to determine the validit y o f the model, the presence o f

heteroscedast icit y, autocorrelat ion, mult ico llinearit y and normalit y tests were
treated well.
i. Heteroscedast icit y
The assumpt io n for heteroscedast icit y is that the variance of the errors is not
constant across observat ion, thus, standard est imat io ns will be inefficient. In
other words, heteroscedast ic occurs in a series o f rando m variables only when
the rando m variables have different variance. Furthermo re, error term in each
period is not constant because the est imat or and error term is influence by
each other.
The White’s test is usually used as a test for heteroscedast icit y. In t his test,
a regressio n o f the squares o f t he residuals is run o n the variables suspected
of causing the heteroscedast icit y, and cross products (Gujarat i, 2004).
n*R 2 = 2 (n)
Number of observat ion is 111 and the R 2 for ROA, ROE and NIM are 0.715,
0.729 and 0.203 respect ively and the calculated value will be 79.365, 80.919
and 22.533 for ROA, ROE and NIM. The 2 obtained fro m 2 table is
82.3581 for 0.90 confidence. If n*R2 < 2, heteroscedast icit y can not be
confirmed. Therefore, no heteroscedast icity problem occurred for all the
abo ve calculated amounts of R 2 are less than the crit ical 2.
ii. Autocorrelat ion Problem
39
Autocorrelat ion problem occurs when the error term in each period is
influenced by each other so that the variance o f error term is not in an
optimal level. The term autocorrelat ion may be defined as “correlat ion
between members o f series o f observat ions ordered in t ime [as in t ime series
data] or space [as in cross-sect ional data]. The most celebrated test for
detecting serial correlat ion is that develo ped by statist icians Durbin and
Watson. It is popularly known as the Durbin – Watson d stat ist ic.
Table 4.5 Durbin–Watson d Test: Decisio n Rules

Null hypothesis Decisio n If
No posit ive autocorrelat ion Reject 0 < d < dL
No posit ive autocorrelat ion No decisio n dL ≤ d ≤ dU
No negat ive correlat ion Reject 4 − dL < d < 4
No negat ive correlat ion No decisio n 4 − dU ≤ d ≤ 4 − dL
No autocorrelat ion, posit ive or negat ive Do not reject dU < d < 4 – dU
Source: Gujarati, 2004
To see the autocorrelat io n problem based in the decisio n rules, significance

points o f dL and dU at 1% level o f significance fro m Durbin–Watson d
statist ic table.
Table 4.6 Result on Durbin–Watson d Test: Decisio n Rules

Null hypothesis Decisio n If
No posit ive autocorrelat ion Reject 0 < d < 1.335
No posit ive autocorrelat ion No decisio n 1.335 ≤ d ≤ 1.765
No negat ive correlat ion Reject 2.665 < d < 4
No negat ive correlat ion No decisio n 2.235 ≤ d ≤ 2.665
No autocorrelat ion, posit ive or negat ive Do not reject 1.765 < d < 2.235
Source: own calculation
According to Table 4.8 model summary Durbin-Watson (d) amount for ROA,
ROE and NIM are 1.829, 1.536 and 1.368 respect ively. Therefore, the result
40
exhibited that there is no posit ive or negative autocorrelat ion exist in t he

ROA model which is the main measurement of banking performance in the
study. There is also no reject io n on the null hypothesis o f no autocorrelat ion
for the supportive models ROE and NIM.
iii. Mult ico llinearit y
According to the assumpt ions of the classical linear regressio n model,

mult ico llinearit y refers to the situat ion where there is eit her an exact or
approximately exact linear relat io nship amo ng the explanatory variables.
Since mult ico llinearit y is a quest ion o f degree and not of kind, so a problem
occurs if the degree o f co llinearit y is high enough to bias the est imates. If
there is perfect co llinearit y, their regression coefficients are indeterminate
and their standard errors are not defined. Even if t he co llinearit y is high but
not perfect, the est imat ion o f regressio n coefficients is possible but their
standard errors tend to be large. Alt hough there is no one unique met hod of
detecting mult ico llinearit y, or measuring its strength, amo ng several
indicators variance inflat io n factor (VIF) and inspect io n of partial
correlat ions is used for this part icular study (Gujarat i, 2004).
When the co llinearit y o f the variable wit h the other regressors increases, VIF
also increases and in the limit it can be infinite. So me aut hors therefore use
the VIF as an indicator of mult ico llinearit y though they are not free o f
crit icism. The larger the value of VIF, the more “troubleso me” or co llinear in
the variable will be. As a rule of thumb, if the VIF o f a variable exceeds 10,
which will happen if R2 exceeds 0.90, that variable is said be highly
collinear.
41
Table 4.7 variance inflat io n factor
Variable VIF 1/VIF
ldr 4.46 0.224327

cir 4.09 0.244589
car 4.06 0.246127
liq 3.69 0.270697
size 3.39 0.295207
sbs 3.16 0.316075
hhi 2.05 0.487749
inf 1.82 0.548311
div 1.80 0.555783
gdp 1.54 0.648247
Mean VIF 3.01
Therefore, the model is free o f mu lt ico llinearit y problem as VIF is less than
10.
The other testing of mult ico llinearit y is examinat ion o f the correlat io n
coefficients that allows studying the null hypothesis o f no correlat io n
between explanatory variables. This study considered 0.8 as t he limit value
of the correlat io n coefficient to confirm the null hypothesis. So, if correlat io n
between two variables exceeds 0.8, we have to reject the nu ll hypothesis; it ’s
not possible to hold the two variables in t he same model. (Gujarat i, 2004). As
shown in the Correlat ion Matrix annex, all correlat ion coefficients are
smaller than 0.8 at which t he pheno menon of co linearit y is pronounced.
Then, there is no problem o f mult ico llinearity.
42
iv. Normalit y Test
Another third important diagnostic test conducted in this paper is the

normalit y assumpt ion (i.e the normally distributed errors). Since, the
histogram is bell-shaped (see appendix 3) and the Shapiro-Wilk W test
statist ic is not significant. The null hypothesis is that the distribut io n of the
residuals is normal, here the p - value is 0.06 we failed to reject the null (at
95%). We conclude then that residuals are normally distributed in t he study,
concluded that there is no the problem o f normalit y in the models.
Shapiro-Wilk W test for normal data
Variable | Obs W V z Prob>z
r| 111 0.84503 13.964 5.882 0.0600
43
Model Summary
Table 4.8. Model Summary b

Mo R R Adj. R Std. Error of Change Statist ics Durbin-
del Square Square the Estimate Watson
F df1 df2 Sig. F

Change Change
1 .846 a .715 .687 .991652587 25.122 10 100 .000 1.829
2 .854 a .729 .702 8.087674500 26.952 10 100 .000 1.536
3 .450 a .203 .123 1.642833740 2.542 10 100 .009 1.368
a) Predictors: (Constant), Size Bank System, Capital Adequacy, Real GDP

Growth, Loan Deposit Ratio, Diversification, Inflation Rate, Cost Income
Ratio, Concentration, Liquidity, Bank Size
b) Dependent Variable: Model 1- Return on Asset. Model 2- Return on Equity and

Model 3- Net Interest Margin
As Table 4.8 exhibit s the model summary, ROE has the highest F-value,
26.952, fo llowed by ROA, 25.122 and NIM, 2.542. The model fit
(“ANOVA”) has to be seen to check the goodness o f fit before looking at R-
square first. Significance o f the model (“Did the model explain the deviat io ns
in the dependent variable”) shows the goodness of fit o f the model. The
lower this number, the better the fit will be. Typically, if “Sig” is greater
than 0.05, we conclude that our model could not fit the data. Based on table
4.10 all three mo dels are significant due to the values o f sig. are less t han
0.05 as 0.000 for ROA and ROE, and 0.009 for NIM which indicates that all
models are good models to measure banks profitabilit y because if sig < 0.01,
the model is significant at 99%. If the model was not significant (a
relat io nship could not be found) or "R-square is not significant ly different
fro m zero."
44
The explanatory power of the model, t he R square, for ROA, ROE and NIM
models are 0.715, 0.729 and 0.203 respect ively, which means that 71.5% of
the variance in ROA and 72.9% of variance in ROE are explained by the
given ten independent variables co nsidered in this paper. For NIM model, the
independent variables explain only 20.3% of NIM and the remaining 79.7%
are unexplained in t he model which means t here are another addit io nal
variables that are important in explaining NIM that have not been considered
in this study. Therefore, ROA and ROE models are better reliable than NIM
to measure pro fitabilit y in Ethiopian co mmercial banks in relat ion to the ten
explanatory variables used in this paper due to the fact that the higher R
square the better explained by the independent variables in the model.
4.1.2.3 Regression Results
Table 4.9 Regressio n on ROA, ROE and NIM Models
Factor ROA ROE NIM

s Coef. Std. Err. P>|t| Coef. Std. P>|t| Coef. Std. Err. P>|t|
Err.
size 1.150847 .5016612 0.024** 9.751418 1.061193 0.000*** .5669467 .2760325 0.040**
car 6.030426 2.204647 0.008*** -8.531263 14.309 0.552 6.590998 2.588003 0.011**
cir -.0109829 .0042388 0.011** .0194912 .0309364 0.529 -.0061835 .0050703 0.223
Liq -.0428816 .0174608 0.016** -.0045314 .131806 0.973 -.0175672 .0213022 0.410
div .8192006 .1153962 0.000*** 2.58318 .5245393 0.000*** -.0392838 .1148574 0.732
ldr -.018925 .0129713 0.148 .1606946 .0827579 0.052* -.0180047 .0157065 0.252
hhi 5.801168 2.375026 0.017** 37.68209 14.82393 0.011** .0652253 2.220522 0.977
sbs -119.3277 48.90794 0.017** -98.13226 215.4319 0.649 -73.48826 40.41491 0.069*
inf .0185065 .010249 0.075* -.0553429 .0894936 0.536 .0373781 .0126131 0.003***
gdp 3.476329 2.727318 0.206 43.04849 25.69418 0.094* 3.565032 3.477618 0.305
_cons -8.859793 4.719008 0.064* -96.64622 22.40418 0.000*** 1.246498 3.857836 0.747
Source: Computed using Stata
ROA suggested that all the bank specific variables: the bank size, capital
adequacy, cost inco me rat io, inco me diversificat io n, and liquidit y except loan
45
to deposit ratio have significant relat io nship wit h bank pro fitabilit y. Amo ng
them Size, CIR, and LIQ are significant at 5% and CAR, DIV are significant
at 1% level that shows they are the mo st crit ical determinants in t he ROA
model. In the same way, industry specific determinants: concentration and
bank size system are both significant at the same level o f significant (0.05).
However, macroecono mic variables: inflat ion is significant at 10%. And real
GDP growth rate is insignificant in the ROA model.
ROE model revealed that some of the bank specific factors can determine,
with different significant level, the profitabilit y o f co mmercial banks in
terms of earnings fro m average equit y. Bank size and diversificat ion are
significant at 1% level o f significance and loan to deposit ratio is significant
at 10%. However, capital adequacy, cost inco me ratio, and liquidit y are
insignificance at ROE model. Concentration has impact on ROE at 5% and
GDP at 10% level o f significance, but size bank system fro m the industr y
specific factors and Inflat ion fro m macroecono mic factors are not
significance when we measure bank profit abilit y by ROE.
In t he third model, amo ng bank specific determinants, bank size and capital
adequacy are significant at 5%. All other bank specific determinants are
insignificant. Inflat io n has impact on NIM with a probabilit y o f 1% and bank
size system also has effect on the net interest margin o f the bank at
significant level o f 10% However, others such as concentratio n fro m industry
specific and GDP fro m macroecono mic factors are insignificant.
4.2 Discussion
According to the descript ive statist ics reported in Table 4.1, the Ethiopian
commercial banks earn on an average posit ive profit o ver the last decade.
However, the difference between minimum and maximum clearly shows that
46
there are large differences in pro fitabilit y amo ng the Ethiopian co mmercial
banks. That means, the mo st profit able commercial bank in Ethiopia earned
6.72 cents o f net inco me fro m a single birr of asset invest ment and 77.71
cents per birr fro m the banks equit y. In proportion to this the ba nk has a
margin o f 10.78 percent. And the maximum losses incurred are a lo ss o f 3.95
and 20.2 cents on each birr of asset invest ment and o n each birr o f
shareho lder equit y respect ively wit h the margin o f 0.51 percent. On the other
hand, the revenue earned throughout the study years is an average o f 2.48
cents fro m each birr invested by t he bank and 22.85 cents fro m their equit y
with the margin o f 4.28 percent.
The discussio n and conclusio n o f the study st ick on the result o f ROA model
whenever there is discrepancy amo ng t heir result s. This is because o f t hat
ROA is not distorted by high equit y mult iplier s (ROE disregards the risks
associated wit h leverage), and it reflects a better measure of a bank’s abilit y
to generate returns on its assets as well as it considers the disparit y in the
abso lute magnitude of the profit s t hat may be related to size. Since around
80% of the independent variables are unexplained in the NIM model, it
should not be taken as a measure model in the discussio n. Moreover, based
on the reasons stated in the methodology part that fixed model is most
commo n technique in the lit erature, and more plausible when the ent ire
populat ion are considered, the discussio n has to focus on the results o f the
fixed effect model (ROA model).
Bank size, natural log o f total assets, is found to have statist ically significant
and posit ive impact on Ethiopian co mmercial banks’ pro fitabilit y as depicted
in the tables 4.9 ROA and NIM are significant at 0.05 and ROE at
0.01significance level respect ively. The Hypothesis number 1 that states
there is posit ive significant relat ionship between bank size and performance
of Ethiopian co mmercial banks is co nsist ent wit h the result o f regressio n.
47
The posit ive coefficient indicates that larger co mmercial banks tend to earn
higher pro fits than smaller co mmercial banks, and vice versa. It support s the
earlier studies (Sufian and Habibullah, 2009; Kosmidou, 2008; and Kosmidou
et al, 2006). This posit ive associat ion between bank size and pro fitabilit y o f
commercial banks may conform that larger banks could be benefited fro m
econo mies of scale.
The find ing o f the study also shows t hat equit y to asset rat io (CAR) is
posit ively and highly significant to bank profitabilit y t hat measured by ROA
and NIM as wit nessed in the regressio n results which agree wit h Hypothesis
number 2 that said there is posit ive significant relat ionship between capital
adequacy and performance of Ethiopian commercial banks. The relat io nship
between capit al adequacy and pro fitabilit y indicates that Ethiopian
commercial banks in t he study period were focusing on making sound lending
decisio ns which reaffirms t hat banks wit h more capital tended to engage in
higher loan risk lending for higher pro fits. On t he contrary, the study implies
that banks that are relat ively poorly capitalized were so conservat ive in
extending loans and thus their profit abilit y would be adversely affected. The
empirical finding is consistent wit h the findings o f other researches which
are conducted by Berger (1995), Demirguc-Kunt and Huizinga (1999),
Staikouras and Wood (2003), Goddard et al. (2004), Pasiouras and Kosmidou
(2007), and Kosmidou (2008). These studies po int out that those well-
capitalized banks face lower risks o f go ing bankrupt, building their credit
worthiness, and reducing t heir cost of funding which will ult imately enhance
their profit margin. However, capital adequacy rat io (CAR), in this study,
shows insignificant to explain bank profit abilit y which measured by ROE.
This shows the effect of the bank capital o n profit abilit y is different
depending o n whether the study considered the profit abilit y o f assets or of
equit y. In the first case, when ROA is co nsidered as the dependent variable,
the effect is posit ive and highly significant, as expected. On t he other hand,
the negat ive effect of banks' capital on the ROE is explained when it is taken
48
as a product of the ROA and equit y mult iplier (the inverse of the rat io of
equit y-to-total assets). i.e., ROE = ROA x 1/(Eq/TA). In consequence, the
decreases o f the ROE result ing fro m increases in t his rat io cannot be
interpreted as decreases in the wealt h created using the capital invested;
rather, they can be seen as a consequence of the decreased level o f
indebtedness or leverage o f the banks.
Expense management or operational efficiency o f the bank, measured by cost

to inco me rat io (CIR), is stat ist ically significant in the first model (ROA) and
is negat ively correlated wit h pro fitabilit y that measured by ROA NIM. The
negat ive sign o f the CIR variable in t he equatio ns of the ROA, and NIM, and
it s significance co incide wit h the 3rd Hypothesis which is about the negat ive
relat io nship between operat ional efficiency (cost inco me rat io) and
performance o f Ethiopian co mmercial banks. Even though CIR is not
significant for the model o f NIM, its negat ive sign has an imp licat ion o f cost
inco me rat io is inversely proportional to profitabilit y. The result o f the stud y
implies that more operationally efficient commercial banks reported higher
profits than those co mmercial banks that have poor expense management over
the study period. Therefore, one of the factors that negat ively affect the
banks’ pro fitabilit y is t he failure o f management to control cost. The result of
the study is consistent with Pasiouras and Kosmidou (2007), and Kosmidou
(2008), among others.
As far as liquidit y rat io (LIQ) is co ncerned, it is found to be statist ically

significant, particularly o n ROA model and negat ively correlated wit h
profitabilit y measures o f all model that coincide Hypothesis number 4. The
negat ive correlat ion between liquidit y and bank profitabilit y reveals t hat the
more liquid a bank is the less profit able it will be. Here one has to interpret
the result wit h caut ion. Of course, a bank should be liquid enough to meet its
depositors’ demand o f wit hdrawing mo ney at any t ime they want to
49
withdraw. The lower rat io of this reveals that the bank will face difficult y in
meet ing payments in the right time. A lo wer ratio of this would also mean
that the bank will not effort lessly get funds or else at an extremely high rate
of interest which will mount the cost of funding and eventually invade
profitabilit y o f the bank. On the other hand, if the bank is excessively liquid,
it means that the bank is in ‘liquidit y trap’ and is keeping its productive
assets idle. This ult imately put the bank’s profitabilit y at risk because an
extremely higher rat io of this would mean that the bank has kept excess
liquid assets inact ive and hence lo sing interest inco me.
The study also agrees wit h Hypothesis number 5 that there is a posit ive
significance relat io nship between inco me diversificat ion and profit abilit y o f
banks. The rat io of non-int erest inco me to total inco me, which measures the
level o f diversificat ion o f a bank’s act ivit ies, is found to have statist ically
significant at 1% and posit ive impact on bank pro fitabilit y part icularly when
it is measured by ROA and ROE. A posit ive and significant associat ion
between this variable and pro fitabilit y reveals that commercial banks in
Ethiopia earned a co nsiderable proportion o f their inco me fro m sources other
than interest over the study period. The result of the study suggests that
commercial banks in Ethiopia need to diversify t heir line o f business
act ivit ies to meet their object ives o f profit maximizat ion.
Concerning loan to deposit rat io the study result failed to match wit h
Hypothesis number 6 that deals wit h the significance o f loan to deposit ratio
on the pro fitabilit y o f the banks, the study finding indicates that there is no
statist ically correlat io n between loan to deposit ratio and profitabilit y o f the
bank.
50
Wit h regard to the set o f exogenous variables, the result suggests a posit ive
relat io nship between bank concentrat ion and profitabilit y in Ethiopia banking
industry (both ROA and ROE are significant at 5%) in line wit h Hypothesis
number 7 (there is a posit ive significant relat ionship between concentratio n
and performance o f Ethiopian co mmercial banks). The posit ive significant
correlat ion of this variable could indicate a high degree o f concentrat ion.
Banks in highly concentrated markets tend to earn monopo ly pro fits. Thus,
the posit ive sign o f concentration may characterize the nature of Ethiopian
banking sector may need for more co mpetit io n and more entry into the
banking market.
Wit h regard to the size bank system (SBS) which reflect the importance o f
bank financing in the econo my and it is measured by t he rat io of total assets
of banks to GDP. The result reveals that the increase o f size bank system has
negat ive and significant correlat ion wit h profitabilit y as measured in ROA
model that agree in significance to Hypothesis number 7 (There is a posit ive
significant relat ionship between bank size system and performa nce o f
Ethiopian co mmercial banks), but the result disagreed wit h its negat ive sign.
Therefore, whenever the contribut ion o f Ethiopian co mmercial banks total
asset to GDP is higher, the bank’s pro fitabilit y beco me lesser as it’s negat ive.
The result is supported by different studies (Demirguc-Kunt and Huizinga,
1999).
As far as t he macroecono mic factors are concerned, the study result shows
that there is no a direct relat io nship between GDP growth and bank
profitabilit y for the variable is found to be statist ically insignificant which
contradict Hypothesis number 10 which assumes there is a posit ive
relat io nship between growth of GDP and profitabilit y. However, the posit ive
sign of the variable supports the argument that econo mic growth posit ively
affects bank profit abilit y mainly t hrough the effect that the econo mic cycle
51
exerts on demand for credit by firms. Inflat ion is also found to be statist ically
insignificant except for the model o f NIM. The result is, therefore, contrar y
to the expectatio n (Hypothesis number 9) but it is posit ively related to bank
profitabilit y.
52
CHAPTER FIVE
5. CONCLUSION AND RECOMMENDATION
5.1 Conclusion
This sect io n provides the conclusio n t hat inferred fro m t he result o f empirical
explorat ion of determinants on Ethiopian commercial banks’ pro fitabilit y. It
contributes much for int erest ing part ies such as government; regulators,
bankers, academician, and stakeho lders through enhance their understanding
on the factors that posit ively or negat ively affect the performance o f
commercial banks.
The study was conducted to invest igate bank specific, industry specific and
macroecono mic explanatory factors of profitabilit y o f co mmercial banks
operating in Ethiopia wit h unbalanced data over the study period (2003-
2012). The study used three indicators of profitabilit y as dependent variables:
ROA, ROE and NIM, and ten explanatory variables: Size, CAR, CIR, LIQ,
DIV and LDR fro m bank specific, HHI and SBS fro m industry specific and
GDP and INF fro m macroecono mic factors. After test ing through Hausman
test, the expected factors were regressed against ROA using fixed effect and
ROE and NIM using rando m effects.
 The posit ive and significant relat ion between bank size and profit abilit y, as
depicted on all measures (ROA, ROE and NIM) indicators that larger banks
tend to be earn higher pro fit than smaller banks, and vice versa. Therefore, in
Ethiopian co mmercial banks context, larger banks could be benefit ed fro m
econo mies of scale.
 The associat ion between capital adequacy and profitabilit y imply that banks
with more capit al engage in higher loan risk lending for higher pro fit. On the
contrary banks that are relat ively poorly capitalized were so conservat ive in
53
extending loans and thus their profit abilit y would be adversely affected. The
result o f having more capital to asset rat io (and, therefore, better solvency)
point out that those well-cap italized banks face lower risks of go ing
bankrupt, building their credit worthiness, and reducing their cost of funding
which will ult imately enhance their pro fit margin.
 The negat ive relat ionship o f cost inco me ratio and profit abilit y, and its
significance o n earning on asset shows that more operat ionally efficient
commercial banks reported higher pro fits than those co mmercial banks that
have poor expense management over the study period. Therefore, one o f the
factors that negat ively affect the banks’ pro fitabilit y is the failure o f
management to contro l cost.
 The negat ive and significant correlat ion between liquidit y and bank
profitabilit y disclo se that the more liquid a bank is t he less pro fitable it will
be. Here one has to interpret the result with caut ion. The lower ratio o f
liquidit y reveals that the bank will face difficult y in meet ing payments in the
right time and it may force to borrow with extremely high rate o f interest and
eventually invade pro fitabilit y o f the bank. On the contrary, if the bank is
excessively liquid (liquidit y trap), it means that the bank is keeping it s
productive assets idle and hence losing interest inco me.
 A posit ive and significant relat ionship of inco me diversificat ion and
profitabilit y shows that commercial banks in Ethiopia earned a considerable
proportion o f their inco me fro m sources other than interest over the study
period. The result o f the study suggests that co mmercial banks in Ethiopia
need to diversify their line o f business activit ies to meet their object ives o f
profit maximizat ion.
 The posit ive significant correlat ion o f HHI could indicate a high degree o f
concentratio n in Ethiopian banking industry. Banks in highly concentrated
markets tend to earn monopoly pro fit s. Thus, the posit ive sign o f
concentratio n may characterize the nature of Et hiopian banking sector may
need for more co mpet it io n and more entry into the banking market. The
54
negat ive and significant associat io n between size bank system and
profitabilit y exhibits whenever the contribut io n of Ethiopian co mmercia l
banks total asset to GDP is higher, the bank’s pro fitabilit y beco me lesser.
Even if t here is no correlat ion between GDP and profit abilit y, the posit ive
sign of the variable supports the argument that econo mic growth posit ively
affects bank profit abilit y mainly t hrough the effect that the econo mic cycle
exerts on demand for credit by firms. Inflat ion is also found to be statist ically
insignificant except for the model of NIM.
Generally, the study found that almo st all internal factors are the most
determinant factors of the pro fitabilit y o f Ethiopian co mmercial banks. Bank
size (Size) which is measured by natural lo g of total asset, Capital adequacy
(CAR) that is calculated as a rat io of bank equit y to average asset. Inco me
diversificat io n (DIV) - non-interest inco mes to total inco me which measures
inco me that generated fro m o ff-balance sheet are among the internal factors
that have posit ive and significant impact on the profit abilit y o f Ethiopian
commercial banks. On the other hand, cost inco me rat io (CIR) - management
efficiency- which is measured by non interest cost divided by t otal o f interest
inco me and no n-interest inco me and liquidit y risk (liquid asset over total
average asset) are among the internal factors that are significant and
negat ively affect the profitabilit y o f the banks.
55
5.2 Recommendation
Based on the research findings, the fo llowing possible reco mmendat ions are
forwarded to all the co ncerned bodies.
Overall the empirical results o f this study provide evidence that, there is a
large difference in pro fitabilit y amo ng Ethiopian co mmercial banks. Their
profitabilit y is mainly do minated by bank-specific factors which are on the
hands o f the management o f the banks. So, the study suggests to the banks’
managers and po licy makers to give high concern on the internal factors of
profitabilit y and set direct io n to manage the most determinant factors of
performance.
Profitabilit y can be realized t hrough enlarging t he size o f the banks in

Ethiopian co mmercial Banks. Thus, there is a possibilit y for banks to be
benefited fro m eco no mies o f scale through expanding market share in
Ethiopian banking industry.
The Ethiopian banking capit al structure provides pro mising pro fit for well
capitalized banks; therefore, stake ho lders are advised to build large capit al
to asset ratio through, for instance, selling their share for better solvency and
reducing fund costs, and ult imately to succeed their object ives o f maximizing
profits.
Efficiency on cost minimizing has a great contribut io n in profit abilit y o f

Ethiopian co mmercial banks. Hence, the study provides suggest ion for
managers to strive in managing properly the level o f no n interest expenses
like administrat ion expenses. For example, installing ATM in co llaborat ion
(like a trend in four banks namely Unit ed Bank SC, Awash Bank SC, Nib
Bank SC and Bunna Bank SC) may reduce operat ional costs.
56
Inco me diversificat ion is the one o f income generat ing area that posit ively
and significant ly affects the bank’s profitabilit y. Therefore, the paper
proposes to the management bodies to expand their non int erest earnings, for
instance charge on ATM service and diversifying invest ments.
Finally, this study is fully designed to test empirically the impact of bank
specific which is mainly based on the balance sheet and financial statement
of banks, industry specific and macroecono mic determinants on banks
profitabilit y. Therefore, the researcher would like to recommend future
researchers to include the impact o f non- financial determining factors of
banks pro fitabilit y such as management qualit y and efficiency.
57
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Annex
64
Appendix A
Table 3.1 Variables Description
Variables Abbreviation Description Exp

ecte
d
Sign
Return on average ROA Net Income after Tax / Average

assets Asset
Return on average ROE Net Income after Tax / Average

equity Equity
Net Inter est NIM Net Inter est Income / Total

Margin Earning Assets
Bank Specific:
Bank Size Size Natural Log of Total Asset +/-
Capital Adequacy CAR Average Equity / Average Asset +
Operational CIR Non Inter est Costs / Inter est -

Efficiency Income + Non Inter est Income
Liquidity Risk LIQ Liquid Asset / Total Asset +/-
Income DIV Non-inter est Income / Average +

Diversification Assets
Loan Deposit LDR Total Loan / Total Deposit +

Ratio
Industr y Specific
Bank HHI The sum of the squares of market

Concentration share of the sample banks
(Herfindahl-Hirschman Index) +
Size Bank System SBS Total Assets of All Banks to GDP +
Macroeconomic
Factors
Real GDP Growth GDP GDP of Countr ies in (%) +
Inflation Rate INF Annual Inflation Rate -
65
Appendix B
Correlation Matrix
roa roe nim size car cir liq div ldr hhi sbs inf gdp
roa 1.0000
roe 0.7518 1.0000
nim 0.2249 0.0246 1.0000
size 0.4886 0.7528 -0.0413 1.0000
car -0.5244 -0.6264 0.1128 -0.6419 1.0000
cir -0.7198 -0.5941 -0.0165 -0.5701 0.7973 1.0000
liq -0.2935 -0.3317 -0.0190 -0.2454 0.4469 0.5015 1.0000
div 0.5859 0.2472 -0.1887 0.0099 -0.1347 -0.3319 0.0552 1.0000
ldr -0.0595 -0.1369 0.1417 -0.4252 0.0330 -0.0585 -0.5427 -0.1464 1.0000
hhi -0.1337 0.0044 -0.1112 -0.1857 -0.0891 0.0465 -0.2306 -0.2721 0.3535 1.0000
sbs 0.2733 0.0875 0.0239 0.2152 0.0374 -0.1516 -0.0430 0.4393 -0.4417 -0.4521 1.0000
inf 0.0530 -0.0431 0.1884 0.1484 0.0108 -0.0642 -0.1093 0.0628 -0.1678 -0.3434 0.5279 1.0000
gdp 0.1301 0.1048 0.0744 0.0717 0.0712 0.0124 0.1503 0.1166 -0.1338 -0.4327 0.0400 -0.2240 1.0000
66
Appendix C
Normality Test

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Determinants Of Commercial Banks’ Performance In Ethiopia 2013

ST. MARY’S UNIVERSITY

DETERMINANTS OF COMMERCIAL BANKS’

DETERMINANTS OF COMMERCIAL BANKS’

A THESIS SUBMITTED TO ST.MARY’S UNIVERSITY,

ST. MARY’S UNIVERSITY

DETERMINANTS OF COMMERCIAL BANKS’

APPROVED BY BOARD OF EXAMINERS

I add a special note of admirat ion and sincere gratefulness to Ato

LIST OF ABBREVIATIONS AND ACRONYMS

ROA Return on Average Asset

ROE Return on Average Equit y

NIM Net Interest Margin

CAR Capital adequacy rat io

CIR Cost to inco me rat io

LDR Loan Deposit Rat io

HHI Herfindahl-Hirschman Index

SBS Size Bank System

GDP Gross Domest ic Product

INF Annual Inflat io n

ECB European Central Bank

NBE Nat ional Bank of Ethiopia

3.2 Sample and Sampling Techniques ....................................................................................... 29

Table 1.1 List of Co mmercial Banks in Ethiopia ..................................... 4

Table 4.1 Descript ive Statist ics of Variables .......................................... 35

Table 4.5 Durbin–Watson d Test: Decisio n Rules .................................... 40

Table 4.6 Result on Durbin–Watson d Test: Decisio n Rules ..................... 40

Table 4.7 Variance Inflat io n Factor ....................................................... 41

Table 4.9 Regression on ROA, ROE and NIM Model ............................................... 45

Figure 2.1 Schemat ic Diagram showing relationships between variables

1.1 Back ground of the Study

The so lidit y and augmentatio n o f any economy to a great extent depend o n

future challenges regarding the performance of all banks. Therefore, beside

According to previous studies, determinant s of profit abilit y are categorized

Many studies have attempted to explain the contribut ion o f a particular

1.2 Background of Banking Industry in Ethiopia

Bank o f Abyssinia, the first modern bank in Ethiopia, was inaugurated on

The Ethiopian banking structure is st ill characterized by co ncentrat ion in

Table 2.1 List of co mmercial banks in Ethio pia

No Private Co mmercial Bank Establishment Year

1.3 Statement of the Problem

To achieve the visio n o f Ethiopian growth plan to beco me a middle-inco me

In t his paper, bank performance, in view of pro fitabilit y, is measured by

For all t he aforement ioned reasons, like limit ed stock of knowledge o n

So the purpose of this paper is to invest igate the effect of bank-specific,

1.4 Research Questions

The specific quest ions are:

 What bank specific factors determine the performance of co mmercial

 What industry specific factors determine the performance o f Ethiopia

 What macroecono mic factors determine t he performance o f Ethiopia

1.5 Objectives of the Study

General object ive:

The main object ive o f the study is to examine bank-specific, industry-

Specific Object ives

 To examine the significance o f bank size on performance o f co mmercial

 To detect the relat ionship between capit al adequacy and performance o f

 To ident ify the impact of operational efficiency on performance o f

 To invest igate liquidit y influence on the performance of co mmercial banks

 To verify the effect of bank size system o n the performance o f co mmercial