Political Risk and Country Governance as Drivers of Bank Profitability: An Insight From a Sub‐Saharan African Country

ABSTRACT This paper investigates how political risk and quality of country governance impact bank profitability in Ethiopia, a politically risky and institutionally weak Sub‐Saharan African country. It also examines the potential channels through which these impacts occur. Using annual financial and non‐financial data obtained from 17 banks, the International Country Risk Guide, and the World Bank for 2013–2024, the research estimates a two‐step system GMM dynamic model of bank profitability. The empirical results unveil that bank profitability in Ethiopia is negatively explained by political risk but positively by country governance quality, corroborating both market‐based and institutional theories. Crucially, these influences are entirely indirect, operating through internal credit, liquidity, and operational risks. The findings are consistent across various econometric frameworks, providing valuable insights for policymakers, regulators and bank executives aiming to enhance banking profitability amid high political risk and poor governance.