Determinants of Commercial Banks’ Profitability in the Emerging Economy: Evidence From Ethiopia

The banking sector has undergone significant transformation in recent years. Nevertheless, combinations of bank-specific and macroeconomic elements present both opportunities and obstacles for bank managers in ensuring the success of their institutions. This paper’s goal is to investigate factors that influence commercial banks profitability in Ethiopia. The current study used quantitative research approach and nine commercial banks were chosen purposively. Data was collected from national bank of Ethiopia and ministry of finance and economic development covering the period of 2007 to 2020. The generalized method of moments is used to (GMM) to analyze the data. The findings of the present research indicate that the size and liquidity of banks possess a favorable and noteworthy influence on the profitability. Conversely, operational efficiency, leverage, credit to deposit ratio, capital adequacy ratio, and interest rate spread has a negative impact on bank profitability. Additionally, inflation has a negative impact on Ethiopian commercial banks’ profitability as determined by return on assets and positive impact on profitability as determined by return on equity, while gross domestic product does not affect bank profitability. Similarly, economic globalization affects bank profitability negatively. The findings of this investigation carry significant ramifications for regulatory bodies of business banks, not only in terms of internal factors but also in consideration of external elements when formulating policies. JEL Classification: P43, M21, O11, O21