Macroeconomic and Bank Specific Determinants of Commercial Bank Profitability in Ethiopia

Abstract

The purpose of this study was to empirically examine the impacts of the macroeconomic and bank-specific variables on profitability of commercial banks in Ethiopia. For the purpose secondary data collected from seven banks over the period 2000-2017 and other sources were analyzed using a panel ordinary least squares regression model for the fact fixed and random effect model found inappropriate after the Hausman tests and Breusch-Pagan Lagrange multiplier (LM). The results of the study showed statistically significant negative impacts of broad money supply and credit risk. Inflation and GDP on the other hand was found with significant positive impacts. Yet, Cash reserve ratio and bank size showed no significant impact on the profitability of commercial banks in Ethiopia. The results suggested the need for enhancing credit risk management practice, optimizing the leverage ratio in increasing bank size. A thorough understanding of the strategic business environment also found highly relevant in commercial bank management for the fact macroeconomic variables and regulatory factors found to have significant implication on profitability.