Factors Affect Profitability

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Factors Affecting Profitability: An Empirical Study on Ethiopian Banking Industry

Amdemikael Abera

A Thesis Submitted to The Department of Accounting and Finance

Presented in Partial Fulfillment of the Requirements for the Degree of Master of Science (Accounting and Finance)

Addis Ababa University Addis Ababa, Ethiopia June 2012

Addis Ababa University School of Graduate Studies

This is to certify that the thesis prepared by Amdemikael Abera, entitled: Factors Affecting Profitability: an Empirical Study on Ethiopian Banking Industry and submitted in partial fulfillment of the requirements for the degree of Degree of Master of Science (Accounting and Finance) complies with the regulations of the University and meets the accepted standards with respect to originality and quality.

Signed by the Examining Committee:

Examiner Ato Abebe Yitayew (Asst. Prof) Signature______________ Date _____________

Examiner Ashenafi Beyene (PhD) Signature_____________________ Date ____________

Advisor Wollela Abehodie (PhD) Signature______________________ Date ____________

__________________________________________________________________ Chair of Department or Graduate Program Coordinator

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ABSTRACT

Factors Affecting Profitability: An Empirical Study on Ethiopian Banking Industry

Amdemikael Abera Addis Ababa University, 2012

This study examines the bank-specific, industry-specific and macro-economic factors affecting bank profitability for a total of eight commercial banks in Ethiopia, covering the period of 2000-2011. To this end, the study adopts a mixed methods research approach by combining documentary analysis and in-depth interviews. The findings of the study show that capital strength, income diversification, bank size and gross domestic product have statistically significant and positive relationship with banks’ profitability. On the other hand, variables like operational efficiency and asset quality have a negative and statistically significant relationship with banks’ profitability. However, the relationship for liquidity risk, concentration and inflation is found to be statistically insignificant. The study suggests that focusing and reengineering the banks alongside the key internal drivers could enhance the profitability as well as the performance of the commercial banks in Ethiopia. Moreover, banks in Ethiopia should not only be concerned about internal structures and policies, but they must consider both the internal environment and the macroeconomic environment together in fashioning out strategies to improve their performance or profits. Finally, the government needs to revisit its requirements imposed solely on private banks like investing 27% of their total loans on bonds at a relatively lower interest rate.

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Acknowledgements

First of all, I would like to forward my sincere thanks and appreciation to my advisor Wollela Abehodie Yesegat (PhD) for her heartfelt exertion, fruitful support, encouragement and guidance in bringing the thesis work to reality.

Then my heartfelt gratitude goes to Addis Ababa University for the financial support provided to me during my thesis work through the Department of Accounting and Finance. Moreover, I am thankful to my employer Haramaya University for the

sponsorship and financial supports.

My special appreciation also goes to the management and staff members of the Ethiopian Commercial Banks, the National Bank of Ethiopia and the Ministry of Finance & Economic Development for their cooperation in providing me all the necessary data required for the study. I would have never been able to complete this thesis without their kind support.

My thanks also belong to Ato Ameha Tefera, Finance manager of Construction and Business Bank Share Company, who gave me a special treatment and devoted his valuable time in responding to the interview questions.

Finally, I would like to express my appreciation to my friend and...
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