Determinant of Bank Profitability

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Determinants of Commercial Banks Profitability: An Empirical Evidence from the Commercial Banks of Ethiopia

Birhanu Tsehay Amare ID No. GSR/ 0695/03

A thesis submitted to The Department of Accounting and Finance

Presented in Partial Fulfillment of the Requirement for the Degree of Master of Business Administration in Finance

Addis Ababa University Addis Ababa, Ethiopia May, 2012

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Addis Ababa University School of Graduate Studies
This is to certify that the thesis prepared by Birhanu Tsehay, entitled: Determinants of Commercial Banks Profitability: - An Empirical evidence from the Commercial Banks of Ethiopia and submitted in Partial Fulfillment of the Requirement for master of Business Adiministration (MBA) in Finance complies with the regulation of the university and meets the accepted standards with respect to oginality and quality.

Approved by the Board of Examiners

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ABSTRACT

Determinants of Commercial Banks Profitability: -An Empirical evidence from the Commercial Banks of Ethiopia Birhanu Tsehay Amare Addis Ababa University, 2012 The main objective of this study is to examine the effect of bank-specific, industryspecific and macroeconomic determinants of Ethiopian commercial banking industry profitability from the period 2000 – 2011. By usig OLS etimation method to measure the effect of internal and external determinants on profitability interms of average return on asset and net interest margin. The estimation results show that profitability persists in some extent, implies that the indicator of the existance of relatively fairly competitive market in Ethiopian commercial banking environment, especially competition between private banks. Regarging the explanatory variables, all bank-specific determinants, with the exception of bank size, expense management and credit risk, affect bank profitability significantly and positively in the anticipated way. However, bank size, expense management and credit risk affect the commercial banks profitability significantly and negatively. In addition to this, no evidence is found in support of the presence of market concentration. Finally, from macro economic determinants GDP has positive and

significant effect on both asset return and interest margin of the bank. But interest rate policy has significant and positive effect only on interest margin. The commercial banks of Ethiopia policy makers and managers should give high concern to the credit risk management, expense management and large bank size management inorder to reduce the hindrance of the profitability of the banks.

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ACKNOWLEDGEMENT
My deepest and warmest thank goes to the Almighty God and his mother Sanity Marry, who help me in all aspect of my life including the achievement of this masters program. Along with, I would like to express my sincere gratitude to Abebe yitayew (Ass. professor) who is Instructor of Department of Accounting and Finance at Addis Ababa University and my advisor, for his expert guidance, helpful criticism, valuable suggestions and encouragement at every stage during the completion of this work. It was pleasant and inspiring experience for me to work under his guidance.

I am also grateful, to NBE change management directors and bank supervision department staffs, for their assistance by giving twelve year audited financial reports. It is my pleasure to thank, the financial officers of all sampled banks, specially thank forwarded to Awash International Bank, Construction and Business Bank and Abiyssina Bank financial officers, those help me by answering the questionnaire.

I add a special note of admiration and gratitude to my families and...
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