The Effect of Political Instability on Bank Profitability: Evidence from Ethiopia

Abstract

The study aims to examine the effect of political instability on Bank profitability. To achieve this object, the researcher used the World Bank database and data from annual audit financial statements of 15 selected commercial Banks for the period 2012-2016. The researcher applied the generalized method of moments to analyze the effect of political instability on Bank profitability. Both descriptive analysis and inferential statistics are made in this regard. The result of the generalized method of moments estimation shows that political instability positively affects Bank profitability. Bank specific variables such as credit risk ratio, Non-interest income to total asset ratio, and Cost to income ratio are essential factors for Bank profitability. Growth of gross domestic product and inflation are significant determinants of Bank profitability. Bank size, liquidity and credit risk ratio are insignificant. The study is helpful to higher government officials, policymakers, Banks shareholders, Banks top management, etc. Moreover, the study contributed to the existing literature by linking political instability and Bank profitability.