The Effect of Asset and Liability Management on Bank Profitability: The Case of Commercial Banks in Ethiopia

Asset and liability management is a comprehensive risk management practice aimed at increasing the return form assets and decreasing expense arise from liability by maintaining the best asset and liability position of the balance sheet. This study was conducted with the main objective of examining the impact of asset and liability management on banks profitability. The research adopted descriptive and explanatory research designed and quantitative research approach. For achieving the pre specified objectives a balanced panel data was extracted form a financial statement’s of 10, commercial banks annual report for the period of 2013-2020. For selecting the banks the purpose and service they are engaged in and the availability of the annual report for the required period was used. The sampling method was purposive sampling method. The SCA model was basically used in the study. 6 variables form asset side, 4 variables form liability side and 2 variables were incorporated in the multiple regression model of the study. The descriptive statics and correlation between the independent variables also carried out. Hence the data was a panel data, all required classical linear regression model which includes normality test, multicollinearity, heteroscedasticity, autocorrelation test and variable omission test were also carried out. for comparing the appropriate panel regression model between OLS, random effect and fixed effect model the required comparison is made and finallythe tests made had revealed the pooled OLS regression model is the appropriate one for this study. Finally, the result of the study affirmed that deposit on other banks, loan and advance; short term investments and other non-interest bearing credits have a positive significant effect on banks performance. The effect of fixed asset, demand deposit, saving and term deposit had been found negative and significant. From macro-economic the researcher had failed to find a significant effect of macro-economic variables on profit of banks. Therefore, the research had recommended to the banks to strength their provision of loan and advances and enhances their other non-interest bearing credits, to boost their profitability. In addition to this the establishment of stock market in the country will recommended to national bank of Ethiopia in order to increase the investment culture of those banks in the country.