Determinants of Private Bank Profitabliy

Determinants of Private Banks’
Profitability in Ethiopia: Panel Data
Evidence
Yigremachew Benti
Addis Ababa
Email: [e-mail]
March 2008
1
Abstract
Using the standard static as well as dynamic models, the study tries to find systematic evidence on the determining factors for the corporate profitability of private commercial banks in Ethiopia. The study utilizes data on balance sheet as well as income statement account items of all the domestic private banks, which have at least been operational since
1999/00 fiscal year. In effect six private commercial banks have been included in this survey.
Regarding the estimation methodology, I employed a static panel data model. However, in order to correct for parameter endogenouty resulting from the likely presence of unobserved bank specific effect and also to address the dynamic relationship, I use the augmented generalized method of moments (GMM) estimator developed by Arellano and Bond (1991) and further developed by Blundell and Bond (1998). As to the econometric software, I make use of STATA to obtain estimates of the static as well as dynamic panel models. All in all, the study results indicate that interest and non-interest incomes and interest expense are the main determining factor for the profitability of private banks in Ethiopia both in static and dynamic conditions. Increase exposure to credit risks has also strong negative impact on profit. The empirical result evident that there is persistence in profitability and speed of adjustment to industry average (equilibrium) is about 16%. On the contrary, market concentration has no significant role on private banks’ profitability. The contribution of other bank level variables (like fixed asset investment, capital adequacy ratio and employees’ productivity) has considerable positive impact on profit. Macroeconomic conditions such as inflation and tax have significant unfavorable impact on operational performances of private

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