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Determinants of Financial Performance: An Empirical Study on Ethiopian Commercial Banks
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Dawit Fekadu
This study examines the determinants of financial performance of commercial banks in Ethiopia by using panel data of seven sample commercial banks out of eighteen commercial banks operated in Ethiopia over the period 2000-2014. Since the data is secondary in nature, the quantitative approach to research was used. Besides, the random effect model was used. Under this study, both internal and external factors were included. The internal factors used in this study include capital adequacy, Asset quality, Earning ability, liquidity management and Bank size whereas, the external factor is foreign exchange rate. Moreover, ROA, ROE and NIM were used to measure the financial performance. This study runs a redundant fixed effects test using Hausman specification test. Hence based on the result random effect model was adopted. Based on the regression result; asset quality, earning ability and bank size have a significant influence on the financial performance of Ethiopian commercial banks mea...
Alaparthi Varaprasad
Tesfaye Boru Lelissa (PHD, FCCA, CERM)
This paper investigates the determinants of Ethiopian banks performance considering bank specific and external variables on selected banks' profitability for the 1990-2012 periods. The empirical investigation uses the accounting measure Return on Assets (ROA) to represent Banks' performance. The study finds that bank specific variables by large explain the variation in profitability. High performance is related to the ability of banks to control their credit risk, diversify their income sources by incorporating non-traditional banking services and control their overhead expenses. In addition, the paper finds that bank's capital and liquidity status are not significant to affect the performance of banks. On the other hand, the paper finds that bank size and macroeconomic variables such real GDP growth rates have no significant impact on banks' profitability. However, the inflation rate is determined to be significant driver to the performance of the Ethiopian commercial banks INTRODUCTION Banks play a vital role in economic development through engaging themselves in an intermediary role which enhances investment and growth. Bashir 2007, observe that commercial banks contribute positively to economic growth by channeling surplus funds to their most productive uses. The literature not only showed the greater function of banks in the economy but also stressed that without the existence of a sound and efficient banking system, the economy can't function well. When a bank fails, the whole of a nation's payment system is thrown in to jeopardy (Ikhide, 2000). On the other front, studies also shown that bank performance also is influenced by the business cycle or economic performance (Dermerguc-Kunt,A. and Huizinga, H., 2001). Both ways of arguments justify the close link of banks and the economy which instigates the need to understand the determinants of bank performance from both the Bank and the aggregate economy wide perspectives. Thus, financial performance analysis of commercial banks has been of great interest to academic research. The performance of commercial banks can be affected by internal and external factors (Flamini, C., Valentina C., McDonald, G., Liliana, S. (2009)). These factors can be classified into bank specific (internal) and macroeconomic variables. The internal factors are individual bank characteristics which basically are influenced by the internal decisions of management and board. The external factors are sector wide or country wide factors which are beyond the control of the company and affect the profitability of banks. Studies have shown that commercial banks in Ethiopia are more profitable with an average Return on Equity (ROE) of 21percent (Yigremachew 2007). One of the major reasons behind high return in the sector is the existence of huge gap between the demand for bank service and the supply thereof. The Bank branch to population ratio reached 62,063.6 in during FY 2011/12 (NBE annual report 2011/12). That means, in Ethiopia despite the growth trend in the number of bank branches, the number of banks are few compared to the demand for the services. Recent data also testifies that mostly, the banking sector has experienced a trend of growing profitability alongside positive trends related to balance sheet expansion (NBE Report 2011/12). However, the contributing factors, whether internal or external, to the greatest profitability earned by the industry was not well analyzed. It is important therefore, to understand if the banking sector profitability is being driven by factors related to the bank or are from external sources or both. This raises some important issues: To what extent endogenous factors impact the performance of banks? Do external factors impact the financial performance of commercial banks in Ethiopia? This will be helpful to identify the reason for the success of some commercial banks among the group and helps to identify the determinants for better performance of the Ethiopian banks. This study, hence basically intends to systematically identify and measure both internal and external factors that impact the performance of the Ethiopian banking sector using data from 1990-2012. The study has different perspectives than the usually observed performance measures applied in most studies done in Ethiopia and other countries. The gaps in literature this study tried to incorporate include: • Most of the research works were not following the regulatory standards to identify the various internal factors that determine the performance of banks. The frameworks used to identify internal determinants sometimes vary with the regulatory rating standards. Also the financial ratios to be used for measuring performance are not in line with the regulatory organ. For instance the loan to deposit ratio which is
Management Studies ISSN 2328-2185
The study examines factors that determine the financial performance of commercial banks in Ethiopia by using time series data over the period 2004-2019 on the sample of seven banks using secondary data. Moreover, the autoregressive distributed lag model was used. Under this study, both internal and external factors were included as the determinants of bank performance which was measured by loan-to-deposit ratio. The internal factors used in this study include capital adequacy ratio, non-performing loan and loan growth while the external factors are real GDP growth and inflation. Based on the results, specific variables except non-performing loan capital adequacy and loan growth affect banks performance significantly in the long run. In the short run, in addition to those two variables, non-performing loan also affects bank performance. Real GDP growth has negative significant effect on the banks performance in both long and short run. Inflation has insignificant effects on bank performances in both long and short run.
ketema sime
The study was attempted to investigate determinants of financial performance of commercial banks in Ethiopian by using secondary data. The data were obtained from audited financial statements of five sampled commercial banks for the period of 1997 to 2017 and National Bank of Ethiopia. The study used return on assets (ROA) and return on equity (ROE) as dependent financial performance variable. Moreover, the study used bank specific variables as explanatory variables. Both descriptive statistics and econometrics model specifically fixed effects estimation were used to analyze the relationships of dependent variable with explanatory variables. The major findings of the study shows that bank specific determinants were very important in explaining financial performance of commercial banks. The management efficiency, customer deposit to total asset ratio, capital adequacy ratio, loan to deposit ratio were positively and significantly related to bank’s financial performance. The study ...
This study examines the determinants of financial performance of a private commercial bank by using the monthly financial statement of Bank ''X''3 from 2011 to 2016. A quantitative research approach was adopted, and the data were estimated using the Ordinary Least Square approach of multiple linear regression model. The study examined only internal factors such as capital adequacy, loan to deposit ratio, income diversification, operating efficiency, export, liquidity, loan performance and deposit mobilization as explanatory variables. Return on Asset, Return on Equity and Net Interest Margin were used as dependant variables to measure the financial performance of the Bank. The finding of the study revealed that income diversification, deposit amount, export level and loan performance have a significant influence on the financial performance of Bank ''X''. Therefore, it is recommended that commercial banks should increase export proceed, capital and lo...
Abdu Mohammed Assfaw
The main purpose of this paper is to investigate the bank specific factors which can affect the financial performance of private commercial banks in Ethiopia. A total of 6 private commercial banks (those having well organized financial data till 2017) were purposefully taken & their audited annual financial reports were analyzed for the period of 2011-2017. For this purpose, descriptive statistic, Pearson Correlation Coefficient and Multiple Linear Regression Analytical approaches were applied. In this study, return on equity, return on asset and net interest margin as the dependent variables and bank specific factors like banks size, liquidity management, asset quality, management efficiency and capital adequacy as independent variables were used. Any autocorrelation problem was checked. The results indicated that capital adequacy, management efficiency and size of banks have positive and statistically significant effect on financial performance of private commercial banks of Ethio...
African Journal of Business Management
Mohammed Sultan
Tesfaye Kassa
Addis Ababa university
Belayneh Hailegeorgis
The aim of this study is to examine the impact of bank-specific, industryspecific and macroeconomic determinants of Ethiopian commercial banks profitability. The study applied the balanced panel data of seven Ethiopian commercial banks that covers the period 2001- 2010. The paper used Ordinary Least Square (OLS) technique to investigate the impact of capital, size, loan, deposits, noninterest income, noninterest expense, credit risk, market concentration, economic growth, inflation and saving interest rate on major profitability indicator i.e., return on asset (ROA). The estimation results show that all bank-specific determinants, with the exception of saving deposit, significantly affect commercial banks profitability in Ethiopia. Market concentration is also a significant determining factor of profitability. Finally, with regard to macroeconomic variables, only economic growth exhibits a significant relationship with banks’ profitability. The results of the study are of value to both academics and policy makers.
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Please note you do not have access to teaching notes, ifrs adoption and accounting regulation in ethiopia.
Accounting Research Journal
ISSN : 1030-9616
Article publication date: 4 November 2019
The purpose of this study is to examine international financial reporting standards (IFRSs) adoption in Ethiopia to explain transnational political-economic antecedents of this change and its associated consequences on the regulatory landscape of accounting.
Design/methodology/approach
Using a neo-Gramscian theory of globalization and the state, the study examines interview and document review evidence pertaining to IFRS adoption in Ethiopia by focusing on the period from 1991 to 2014.
The study illustrates that a dialectical rather than deterministic interaction between global and national forces explains IFRS adoption in Ethiopia, i.e. IFRS adoption falls within the broader scheme of universalizing regulatory institutions in the globalizing world economy. Compared to the commonly understood trends of IFRS adoption circumscribed within a pre-existing regulatory framework, this study illustrates IFRS adoption as a primary driver of major reforms to the accounting regulatory landscape.
Originality/value
This study contributes original theoretically grounded insights into the transnational political-economic rationale for IFRS adoption and consequences of the adoption on the accounting regulatory landscape.
- Accounting regulation
- Accounting standards
- Neo-Gramscian theory of globalization
Wagaw, Y.M. , Mihret, D.G. and Obo, D.D. (2019), "IFRS adoption and accounting regulation in Ethiopia", Accounting Research Journal , Vol. 32 No. 4, pp. 662-677. https://doi.org/10.1108/ARJ-02-2017-0033
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Factors Affecting the Financial Performance: A Case of Microfinance Institutions in Ethiopia
Mulugeta Abuye Ertiro
Department of Accounting and Finance, Wachemo University, Hossana, Ethiopia
Leyla Jemal Mohammed
Add to Mendeley
Micro finance institutions in Ethiopia have shown a remarkable qualitative and quantitative growth since the early 1990s. It is increasingly understood that adequate financial services such as loans, saving products, insurance and payment services for the broad population, poor farmers and MSEs, promote quality and productivity. Thus, this study examined and presented the most prominent factors of financial performance of microfinance institutions in Ethiopia by using panel data. From a total population of 38 MFIs operating in Ethiopia; the study selected 17 microfinance institutions which are operating in the period 2011 to 2018. The fixed effect model was used after running a Hausman test. ROA was used as a proxy for the financial performance measurement and the study used the internal and external factors. Based on the regression analysis, the internal variable like age of microfinance institutions was showed to be significant variables with positive relationship to ROA and other internal variables such as capital to asset ratio and debt to equity ratio were found to be statistically negatively significant. But operational efficiency, portfolio quality and size of microfinance institutions were found to have insignificant effect on ROA. On the other hand, the only external variable market concentration was insignificant factors of microfinance institution in the study period. Based on the regression outcome, the study concluded that the management of the microfinance institutions may develop sound mobilizing savings campaign strategy in order to collect adequate savings from depositors and mostly operate on membership contribution to enhance MFI’s capital for ensuring unexpected losses and also MFI managers should develop the efficiency of operations from year to year.
| Published in | ( ) |
| DOI | |
| Page(s) | 64-77 |
| Creative Commons |
This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License ( ), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited. |
| Copyright | Copyright © The Author(s), 2022. Published by Science Publishing Group |
Microfinance Institutions, Financial Performance, ROA
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Mulugeta Abuye Ertiro, Leyla Jemal Mohammed. (2022). Factors Affecting the Financial Performance: A Case of Microfinance Institutions in Ethiopia. Journal of Finance and Accounting , 10 (1), 64-77. https://doi.org/10.11648/j.jfa.20221001.17
Mulugeta Abuye Ertiro; Leyla Jemal Mohammed. Factors Affecting the Financial Performance: A Case of Microfinance Institutions in Ethiopia. J. Finance Account. 2022 , 10 (1), 64-77. doi: 10.11648/j.jfa.20221001.17
Mulugeta Abuye Ertiro, Leyla Jemal Mohammed. Factors Affecting the Financial Performance: A Case of Microfinance Institutions in Ethiopia. J Finance Account . 2022;10(1):64-77. doi: 10.11648/j.jfa.20221001.17
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