The Impact of Asset & Liability Management on Profitability: Evidence from Selected Private Commercial Banks in Ethiopia

This research meticulously investigates the intricate interplay between Asset and Liability Management (ALM) practices and the profitability dynamics of selected private commercial banks in Ethiopia over the period spanning 2011 to 2023. Employing a comprehensive fixed effect balanced panel regression analysis across a time horizon of 13 years and encompassing data from ten meticulously chosen banks, this study sheds light on critical aspects of financial management in the banking sector. Utilizing a quantitative approach and an explanatory design rooted in secondary data extracted from audited financial statements, the study rigorously examines a spectrum of key variables. These variables include income diversification, liquidity, bank size, GDP, asset quality, capital adequacy, loan and advance, and operational efficiency, all meticulously analyzed using E-view 12 econometrics software. The research findings underscore the pivotal significance of certain factors in enhancing bank profitability. Notably, asset quality, liquidity ratio, GDP, loan and advance, and bank size emerge as positive influencers on bank profitability, exhibiting statistically significant impacts. Conversely, operational efficiency and income diversification were found to exert negative effects on profitability. Surprisingly, capital adequacy was established as statistically insignificant in this context. This study accentuates the critical importance of asset quality, operational efficiency, liquidity management, bank size, GDP, income diversification, and loans as fundamental drivers of banks' return on assets. By accentuating the strategic significance of these variables, bank managers are equipped to navigate the complex financial landscape, leveraging effective ALM strategies to optimize profitability and ensure sustained financial viability.