Effect of Bank Specific Factors on Profitability of Commercial Banks in Ethiopia

Abstract

Financial institutions specifically commercial banks play a significant and energetic role for developing an economy of a country. When the banking sector in a country is functioning in an efficient, effective, and disciplined way it leads to bring a rapid growth in the various sectors in the country. Many factors may impact on profitability of commercial banks. Basically, it can be categorized as bank internal factors and bank external factors. This paper tried to investigate the effect of bank specific factors on profitability of selected commercial banks in Ethiopia. The researcher identified return on asset as a dependent variable whereas bank size, capital ratio and management efficiency as an independent variables. For the achievement of the objectives the researcher collected secondary data in the form of annual audited financial statements from eight selected sampled commercial banks to investigate the effect of selected bank specific factors on profitability for six years from 2013 to 2018. In order to select sampled banks from all the total of 17 commercial banks operating, purposive sampling method was employed. This study adopted an explanatory approach by using panel data research design to fulfill the objectives. The collected data have been analyzed using random effect model of panel data analysis. The results of the study shows that capital ratio and management efficiency are positively related with profitability but bank size negatively related with profitability. Bank size significantly negatively affects profitability, capital ratio insignificantly positively affects profitability and management efficiency significantly positively affects profitability of banks. It is concluded that management efficiency is the major factor of profitability from the variables included in the model. Keywords: