Financial distress and its determinants: evidence from commercial banks in Ethiopia

Despite a broader range of empirical studies on the factors affecting bank financial distress, the findings remain mixed and leave a gap in the literature. This paper empirically examines the determinants of financial distress in private banks in Ethiopia. The study used a panel dataset of eight banks covering the period 2008–2023. Financial distress is measured by Altman Z score and Standard Z score. A higher Z score implies better financial stability and lower financial distress. The average Z score of 1.903 suggests that sample banks fall in the “gray zone”, indicating a moderate level of stability. The regression results shows that last year z-score, capital ratio, earning ability, bank size and inflation have a positive significant effect on financial stability, potentially reducing financial distress. The liquidity ratio, bank concentration and sensitivity to market risk significantly hurt bank stability, causing financial distress. The findings have insightful policy implications, with a focus on ensuring bank resilience and financial sustainability.