Determinants of Profitability in Selected Commercial Banks in Ethiopia

In today’s economy, banks play significant and irreplaceable roles in the growth of financial services, which ultimately leads to the overall success of the economy of a country. The very objective of this study was to investigate bank-specific and macro-economic determinants of the profitability of commercial banks in Ethiopia. The empirical analysis is carried out using the generalized method of moments (GMM) estimation of dynamic panel data from 10 banks covering 9 years of operation from 2012 to 2020. Descriptive statistics and econometrical analysis were employed to realize the stated objectives. To achieve the study objective, secondary data were collected from the annual audited financial statements of sampled banks and the National Bank report for the stated period. The model results of the study revealed that in the short run, fixed time deposits, loans and advances, real gross domestic product (%), and exchange rates have a positive and statistically significant effect on the profitability of banks, while employee salary and benefits, inflation, and the nominal lending rate have a negative but statistically significant effect on the profitability of banks in Ethiopia. In addition, the efficiency ratio has a positive but statistically insignificant effect on the profitability of banks in Ethiopia. However, in the long run, only loans and advances have a positive and statistically significant effect on the profitability of banks in Ethiopia. Private commercial banks should also give more consideration to fixed-time deposits, loans, and advances, as they are found to have the highest positive influence on the profitability of commercial banks in Ethiopia