Determinants of financial performance in private banks: A case in Ethiopia

Abstract

The objective of this study is to empirically assess the effect of bank-specific and macroeconomic determinants of Ethiopian private commercial banks financial performance using three measures namely, return on assets (ROA), return on equity (ROE) and economic value added (EVA) for the period 2006 to 2015 by using multiple regression on a sample of seven private commercial banks. The results indicated that performance persists to some extent, indicating the existence of relatively fair competitive market in private commercial banking environment. Regarding the explanatory variables from bank-specific determinants, Capital adequacy (CAP has a significant and positive relation with ROA and significant and negative relation with ROE and EVA. In addition, ASQ has a significant and negative relation with ROA and insignificant and negative relation with ROE and EVA. Whereas ME affect bank performance (ROA, ROE and EVA) significantly and negatively. On the other hand, LIQ and BS affect bank performance (ROA, ROE and EVA) significantly and positively. Furthermore, GDP has an outsized positive and significant effect on both ROE and EVA but an insignificant effect on ROA. Therefore, Ethiopian commercial banks policy makers and managers should give high emphasis on CAP, ASQ, ME, LIQ, BS and GDP as these were found to have significant effect on private commercial banks financial performance. \n \n \xa0 \n \n Key words: Financial performance, return on assets (ROA), return on equity (ROE) and economic value added (EVA).