SELECT COLLEGE

SCHOOL OF POSTGRADUATE STUDIES

Determinants of profitability of Banks in Ethiopia: The case of

Commercial Bank of Ethiopia in Partial Fulfillment for Masters of
Business Administration

Prepared by: Negat Mekonen

Advisor: Dr. Samson Assefa

May 05, 2023

 DECLARATION

I hereby declare that the work which is being presented in this dissertation entitled “Determinants of
profitability of Banks: The case of Commercial Bank of Ethiopia” in partial fulfilment for
Degree in Masters of Business Administration is my original work, has not been presented for a
degree in any other university or any publication and that all sources of material used for the thesis have
been duly acknowledged.

___________________ _________________

Negat Mekonen Date

_____________________ ________________

Dr. Samson Assefa Date

(Advisor)
 SELECT COLLEGE

SCHOOL OF POSTGRADUATE STUDIES

DETERMINANTS OF PROFITABILITY OF BANKS: THE CASE OF COMMERCIAL

BANK OF ETHIOPIA

By: Negat Mekonen

Approved by Board of Examiners:

Dr. ______________________

Dr. Samson Assefa ________________________

Advisor

Dr. ________________________

Internal Examiner

Dr. ________________________

External Examiner
 Acknowledgment

I would like to acknowledge my family for their all rounded help throughout the process of this
study and my life in general. I would like also to acknowledge my advisor Dr. Samson Assefa .for
his all rounded support through the process of making this paper, Ato Yilma, Ato Negasi, Ato
Kagnew and all other CBE staffs for their kind cooperation in providing the data and guidance to
the possible available department. I would like to give my gratitude for National Bank of Ethiopia
staffs for their kind cooperation in providing the available data. In addition, I would like to extend
my gratitude to W/ro. Hibret and Ato Getnet for their technical support and advise while using
eviews software for econometric analysis and W/rit. Bezawit Leul her review comment.
 I

Table of contents

Contents pages

Acknowledgment……………………………………………………………………………….I
Table of contents .......................................................................................................................................... II
List of Table………………………………………………………………………………………V
List of Figure .............................................................................................................................................. 8
Abstract........................................................................................................................................................ 11
CHAPTER ONE ............................................................................................................................................ 1
INTRODUCTION ......................................................................................................................................... 1
1.1. Statement of the problem ................................................................................................................... 3
1.2. Research questions ............................................................................................................................. 4
1.3. Objective ............................................................................................................................................ 4
1.3.1. General Objective ....................................................................................................................... 4
1.3.2. Specific objectives ...................................................................................................................... 4
1.4. Significance of the study .................................................................................................................... 4
1.5. Scope and Limitation of the study ..................................................................................................... 5
1.6. Organization of the Study .................................................................................................................. 5
CHAPTER TWO ....................................................................................................................................... 7
LITERATURE REVIEW .......................................................................................................................... 7
2.1. Empirical Reviews on Determinants of bank performance ................................................................ 7
2.2. Profitability Measures ....................................................................................................................... 19
2.3. Contradicting findings of determinant variables impact on profitability .......................................... 23
2.3.1. Internal determinants ................................................................................................................. 23
2.3.2. External determinants ................................................................................................................ 27
2.4. Theoretical frame work ..................................................................................................................... 30
CHAPTER THREE ..................................................................................................................................... 32
RSEARCH METHODOLOGY AND DATA COLLECTION ................................................................... 32
3.1. Data Collection II ............................................................................................................................. 32
3.2. Variables Selection, Description and Measurements ........................................................................ 32
3.3. Model Specification .......................................................................................................................... 37
 3.4. Estimation Techniques ...................................................................................................................... 38
3.4.1. Unit Root Tests/ Stationary Rate ............................................................................................... 38
3.4.2. Co integration Tests ................................................................................................................... 39
3.4.3. The Vector Error correction Model ........................................................................................... 40
3.4.4. Diagnostic Tests......................................................................................................................... 41
CHAPTER FOUR ....................................................................................................................................... 42
DATA PRESENTATION AND DESCRIPTIVE ANALYSIS ................................................................... 42
4.1. Profitability ....................................................................................................................................... 43
4.1.1. Net Profit ....................................................................................................................................... 43
4.1.2. Return on Asset ............................................................................................................................. 44
4.2. Liquidity............................................................................................................................................ 45
4.2.1. Loan ............................................................................................................................................... 45
4.2.2. Deposit ........................................................................................................................................... 46
4.2.3. Liquidity Ratio ............................................................................................................................... 47
4.3. Capital Adequacy .............................................................................................................................. 48
4.3.1. Size of Banks ................................................................................................................................. 48
4.3.2. Capital............................................................................................................................................ 49
4.3.3. Capital Ratio .................................................................................................................................. 50
4.4. Market Structure ............................................................................................................................... 51
4.4.1. Market Concentration .................................................................................................................... 51
4.4.2. Market Share.................................................................................................................................. 52
4.5. Branch Network ................................................................................................................................ 53
CHAPTER FIVE ......................................................................................................................................... 54
ECONOMETRIC DATA ANALYSIS AND ESTIMATION ..................................................................... 54
5.1. Test of stationary............................................................................................................................... 54
5.2. Optimal Lag selection ....................................................................................................................... 55
5.4. Co-Integration Estimation (Long-run analysis) .................................................................................... 56
5.6. Short run analysis Vector Autoregressive Model (VAR) ................................................................. 59
5.4. Diagnostic Tests ................................................................................................................................ 60
CHAPTER SIX............................................................................................................................................ 64
CONCLUSION AND RECOMMENDATION........................................................................................... 64
6.1. Conclusion ........................................................................................................................................ 64
6.2. Recommendation .............................................................................................................................. 65
REFERENCE .............................................................................................................................................. 66
 List of Table

Table: 3.1 Variables Description ..............................................................................................

Table 3.2. Variable definitions and Measurement .................................................................
Table 4.1. Banking Industry Data 2014 profit in rank .......................................................................
Table 4.2 Statistical variables for Profit trend of Commercial bankof Ethiopia ................................
Table 4.2. Statistical variables for Return on asset trend of commercial bank of Ethiopia ..............
Table 4.4. Statistical variables for Loan trend of commercial bank of Ethiopia ................................
Table 4.5. Statistical variables for Deposit trend of commercial bank of Ethiopia ...........................
Table 4.6. Statistical variables for liquidity trend of commercial banks in Ethiopia .........................
Table 4.8 Statistical variables for commercial banks in Ethiopia ......................................................
Table 4.9 Statistical variables for capitals of commercial bank of Ethiopia ......................................
Table 4.10. Statistical Variables for Capital Ratio of Commercial Banks in Ethiopia ..........
Table 4.12. Statistical Variables for Market Structure of Commercial Banking Industry in Ethiopia
................................................................................................................................................
Table 5.1 Unit root test of dependent and independent variables with 5% level significance ..........
Table 5.2 Lag selection test ..............................................................................................................

List of Figure
Figure 2.1: Conceptual Framework for impact of macro and Industry level factors on Profit Return of
commercial banks in Ethiopia ............................................................................................................

Graph 4.1. Profit trend of Commercial Bank of Ethiopia between 1990 and 2013 ...........................

Graph 4.4. Trend of Return on asset for Private Banks collectively and CBB and CBE individually

..................................................................

Graph 4.5. Commercial Bank of Ethiopia loan trend for the year 1990 to 2013 ...............................

Graph 4.8. Deposit trend of Commercial Bank of Ethiopia during the period of 1990 to 2013 ........

Graph 4.11. Liquidity ratio trend of Banks in Ethiopia ....................................................................

Graph 4.12. Trend for size of commercial Bank of Ethiopia ............................................................

Graph 4.15. Capital trend of commercial Bank of Ethiopia ..............................................................

Graph 4.18. Capital Ratio trend of Commercial Banks in Ethiopia ...................................................

Graph 4.19. Market Concentration trend of Commercial Banks in Ethiopia .....................................

Graph 4.20. Market Share trend of Commercial Banks in Ethiopia ..................................................

Graph 4.21 Trend of Commercial Bank Branch Network .................................................................

 VI

Acronyms
ISE-Istanbul Stock Exchange

S.C.-Share Company

NBE-National Bank of Ethiopia

CBE-Commercial Bank of Ethiopia

DBE-Development Bank of Ethiopia

ROA-Return on Asset

ROE-Return on Equity

LQ-liquidity

OV-Overhead Cost

CA-Capital Adequacy

SI-Size

MSh-Market Share

MC-Market Concentration

GDP-Gross Domestic Product

CPI-Consumer Prise Index

MS-Money Supply

ALIR-Average Lending Interest Rate

MDIR-Minimum Deposit Interest Rate

IRM-Interest Rate Margin

SSA-Sub Saharan Africa

 VII
ABSTRACT
There is a transformation of banking industry from monopoly to monopolistic market dominated
by commercial bank of Ethiopia as residue of Command economy impact. According to Okelue
and et al (2012) study found that the Nigerian banking sector is oligopolistic and market
concentration positively and significantly impacts on bank performance. In addition to this, there
is observed growth of branch network of both private and public Banks. According to Pearce and
Robinson (2003) express the ability of any business to operate in long run depends on level of
profits and Mlachila and et al (2013) study revealed the banks in Sub-Saharan Africa has been
attaining above 2% return on asset. The ultimate objective of this paper is to determine the most
crucial industry specific and macroeconomic determinant factors for the profitability of
Commercial bank of Ethiopia.
Based on this study, Structural Changes in the banking industry and specifically in commercial
bank is observed in significant amount after the year 2003 and/or 2004 G.C. onwards. All variables
used under this study happen to be insignificant in short run. But in the long run both internal
variables like management efficiency and liquidity happen to affect profitability of commercial
Bank of Ethiopia significantly and negatively and capital adequacy happen to affect profitability of
CBE significantly and positively. Industry specific factors Market concentration has shown
significant and positive relation with profitability of CBE. While Macroeconomic variables such
as economic growth have shown significant and positive impact on profitability of CBE while
Minimum deposit interest rate and inflation happen to influence profitability of CBE significantly
and negatively in long run.
The researcher recommends new entrants to the market should consider to enter the market with
high capital, strategy to efficiency in management and where there is forecast of high economic
and domestic product growth. This study also recommend the existing banks to increase their
capital. This paper also recommends Commercial Bank of Ethiopia authorities to work extra on
non-traditional banking, market dominance, and management efficiency while taking the expansion
policy during expected high economic growth and low inflation. Finally, this paper recommend
further study to test the impact of macro and micro specific variables taking quarterly data and/or
panel data from 2004 onwards during the period of significant change.
Key words: CBE,ROA, Profitability, Co-integration, VAR, Banking
VIII
0|Page
 CHAPTER ONE

INTRODUCTION
1.1. Background of Study

What is profitability?

Pearce and Robinson (2003) express the ability of any business to operate in the long run depends
on attaining an acceptable level of profits and strategically managed firms characteristically have
a profit objective usually expressed in earnings per share or return on equity. According to
Mlachila and et al (2013) study the average return on asset of banks in sub-saharan africa has been
above 2% and average return on equity has been 20%.

Huff and et al (2009) described oligopoly exists when a few rivals compete for buyers in relatively
predictable ways. According to Okelue and et al (2012) study on the structure of the Nigerian
Banking Sector, they found that the Nigerian banking sector is oligopolistic in structure and that
market concentration positively and significantly impacts on bank performance. These results
suggest that market concentration is a major determinant of bank profitability in Nigeria.

Ethiopian Banking Review

Following proclamation No.207/1955 of October 1963, Commercial Bank of Ethiopia took over
the commercial banking activities of the former State Bank of Ethiopia and the declaration of
socialism in 1974 saw Addis Ababa Bank, Banco di Roma and Banco di Napoli Merged in 1976
to form the second largest Bank in Ethiopia called Addis Bank which later were merged with
commercial Bank of Ethiopia by proclamation No.184 of August 2, 1980 to form the sole
commercial bank in the country till the establishment of private commercial banks in 1994 by

EPRDF declared a liberal economy system. But later in line with Monetary and Banking
proclamation of 1994 established the national bank of Ethiopia as a judicial entity, separated from
the government and outlined its main function. Monetary and Banking proclamation No.83/1994
and the Licensing and Supervision of Banking Business No.84/1994 laid down the legal basis for
investment in the banking sector. Consequently after the proclamation the first private bank,

1|Page
Awash International Bank was established in 1994 by 486 shareholders. Then after Bank of
Abyssinia(1996), Wegagen Bank (in 1997), United Bank (in 1998), Nib International Bank (in
1999), Dashen Bank (in 2003), Cooperative Bank of Oromia (in 2005), Lion International Bank
(in 2006), Oromia International Bank (in 2008) , Buna International Bank (2009), Zemen Bank
(2009), Birhan International Bank (2010), Abay Bank S.Co. (2010), Addis International bank in
(2011), Debub Global Bank (2013) and Enat bank (20113) were the banks established to total 16
private banks and two public commercial Banks. (nbe.gov.et, May 2015)

Summary

There is a transformation of banking industry from monopoly to monopolistic market dominated

by commercial bank of Ethiopia as residue of Command economy impact. According to Okelue
and et al (2012) study found that the Nigerian banking sector is oligopolistic and market
concentration positively and significantly impacts on bank performance. In addition to this, there
is observed growth of branch network of both private and public Banks. According to Pearce and
Robinson (2003) express the ability of any business to operate in long run depends on level of
profits and Mlachila and et al (2013) study revealed the banks in Sub-Saharan Africa has been
attaining above 2% return on asset.

There has been different studies on the determinants of profitability in Ethiopian Banking
industries. of these studies pentela (2015) using panel data of seven banks from 2001 to 2010,
Habtamu (2012) studied also determinants of private banks profitability taking panel data of seven
private banks on the period from 2002 to 2011 and SAMUEL (2015) study to investigate
determinants of commercial banks profitability in Ethiopia by using panel data of eight commercial
banks from year 2002 to 2013 where among the recent studies. But there is an observed fact that
there is no research accessible done to assess the impact of market structure change specially
during the transition periods from monopoly to monopolistic market structure by the entry of
construction and business bank in 1983 and private banks in 1994. This is characterized by most
studies focused to panel data after 2000. Therefore this paper will try to address this gap by analysis
of market concentration and other bank specific, industry specific and macroeconomic factors on
profitability of Commercial Bank of Ethiopia.

2|Page
1.1. Statement of the problem
Commercial banks appear very profitable in Sub-Saharan Africa (SSA), average returns on assets
were about 2 percent over the last 10 years, significantly higher than bank returns in other parts of
the world. (Mlachila and et al (2013)) Ethiopia’s economy is growing in double digit over the last
couple of years and there is a growth in investment through the years which is implicated in a
growing demand of loans. There is also a growing demand for finance from Government due to
extensive investment in the development of infrastructures and capital intensive investments.
There is also high growing demand for financing from private sector in and after liberalization of
the economy.

There is growing new private banks to the industry which can be correlated to assumed constant
profitability history. To the researchers knowledge there is no research available which has studied
the impact of banking industry dynamics change from expansion and new entrant factor. Due to
growth and expansion of the economy there is high demand for financing of both public and private
investments. In addition to this there is high ambiguity on both significance and direction of
macroeconomic factor. Therefore, this paper will try to address one of the critical issues how the
banking industry is responding to changes in the dynamics and what and how significantly internal
and external factors in determining profitability of the industry are.

Through the process the paper will try to address the questions like what is the impact of new
entrant’s and what are the situations they need to analyze before establishment and after
establishment to maximize the profitability and stock return? It will also help management to
design its policy taking the factors like banking industry dynamics, macroeconomic variables and
internal variables into consideration. What the policy directions of NBE should be regarding the
new entry criteria in relation to banking industry dynamics of expansion and monopoly character
to keep the industry productive, to help the new entrants go in the productive and profitable
direction and to help the industry competitive internationally. In addition, since this paper will be
taking a spoon of water from the sea of stock, bank and management issues in context of Ethiopian
economy, it is expected to initiate further more studies to be produced based up on the findings of
this papers.

3|Page
1.2. Research questions
• Do the macroeconomic and industry specific factors have impact on profitability of
Banking in Ethiopia? If so, what are the determinant factors? How significantly and in
which direction are they affecting?
• How is the change in the industry dynamics due to expansion and new entrant affecting the
profitability of the banks?

1.3. Objective

1.3.1. General Objective

 The ultimate objective of this paper is to determine the most crucial industry specific
and macroeconomic determinant factors for the profitability of Commercial bank
of Ethiopia.

1.3.2. Specific objectives

 to determine the trend key variables of commercial Bank of Ethiopia and compare
to industry
 To examine and evaluate the effects and direction of macroeconomic variables on
profitability of banking industry in general and commercial banks of Ethiopia
specifically.
 To examine and evaluate the effects and direction of change in the banking
industry dynamics on profitability of banking industry in Ethiopia and its specific
effect on commercial bank of Ethiopia.

1.4. Significance of the study

In order to survive in the long run, it is important for a bank to find out what are the determinants
of profitability so that it can take initiatives to develop strategy with ultimate target to increase
their profitability. However, owing to the fact that there are few studies on the determinants of
bank profitability, various studies indicate divergent views on the effect of macroeconomic factors
on bank profitability and most studies show the determinant excluding the fact that there is also
change in the dynamics of banking industry in Ethiopia following rapid expansion of existing

4|Page
banks and high number of new entrants. For these reasons, it is not clear whether or not this
dynamics is affecting the profitability of the industry as well as the effect of other determinants.

So, this paper will try to address the questions on the impact of banking industry dynamics on
banking industry. In addition, it tried to assess direction and significance of macroeconomic factors
in profitability of banking industry in Ethiopia. Therefore, this paper will be expected to

• Provide stake holders of commercial bank for its sustainable profitability

• Provide national bank and other regulatory bodies with the experience of banking trend of
banking profitability with consideration of extended impact of command economy after
liberalization
• Provide information for private banks to understand the bases of the market structure they
are in and its impact

1.5. Scope and Limitation of the study

The study tries to analyze the determinant factors based on the secondary data from National Bank
of Ethiopia and Commercial Bank of Ethiopia, and other related statistic organizations. There is
lack of data for long period of time trend analysis and even organized data. Availability of data for
specific factors like number of branch openings per yearly history and Non-performing loan
specifically and loan data in general was also the challenge to make a comprehensive analysis and
make a suggestion. Accessibility and organization of data is the biggest challenge during the
journey of this study.

1.6. Organization of the Study

The study is organized in five chapters: the first part includes the introduction part which will
includes review of background of the Ethiopian economy and commercial banking history in
Ethiopia, statement of the problem and research questions, objectives and scope and limitation.
Following the introduction part, chapter two reviews relevant theoretical and empirical literature
on profitability measures and determinant factors of the profitability including the current
macroeconomic performance of the country. Chapter three describes the research design and model
specification, including descriptions of variables, are presented. In chapter four the data collected
will be organized and presented in comfortable way and presents the descriptive and econometric
5|Page
analyses of the relationship among determinant factors and banks deposit and the result
interpretations. The last chapter concludes the study with presentation of the policy implications.

6|Page
 CHAPTER TWO

LITERATURE REVIEW

2.1. Empirical Reviews on Determinants of bank performance

Determinants of banks profitability are classified basically in two groups as internal and external
variables. Internal variables are those variables which are in the control of the management while
external variables are those variables which are beyond the reach of the management. Internal
variables can be sub-divided into financial statement variables (e.g. Capital, liquidity) and
nonfinancial statement variables (e.g. Number of branches, status of branches, location). External
variables can sub-divided into country level (e.g. GDP, Inflation, Money supply) and Industry
specific (e.g. Market concentration, ownership).

The interplay or relationship between various macroeconomic factors is the subject of a great deal
of study in the field of macroeconomics. While macroeconomics deals with the economy as a
whole, microeconomics is concerned with the study of individual and their decision-making. Most
literature and cross reference studies consider internal factors, such as management policy
decisions and external factors like economic environment as determinant factors and examine
either a particular country or a number of countries.

Molyneux and Thorton (1992)were among the leading to examine the determinants of banks
profitability in several countries using a sample of 18 European countries over the period 1986
1989 and found a positive correlation between the return on equity and the level of interest rates,
bank concentration and the government ownership. Berger (1995)also examined the US banking
sector. He found that return on equity and capital to asset ratio are positively associated over the
period 1983 1992.

In studies like that of Demirguc Kunt and Huizingha (1999) considered a comprehensive set of
bank characteristics (such as size, leverage, type of business, foreign ownership), macroeconomic
conditions, taxation, regulations, financial structure and legal indicators to examine the
determinants of bank interest margins and profitability in 80 countries over the period 1988 1995
and found out: well capitalized banks have higher net interest margins and are more profitable,
banking sectors, where banking assets constitute a larger portion of the GDP, have smaller margins
7|Page
and are less profitable and that a larger stock market capitalization to bank assets is related
negatively to margins, bank concentration ratio positively affects profitability, macroeconomic
factors implicit and explicit financial taxation, deposit insurance and the legal and institutional
environment also explained variation in interest margins.

According to Amer and et al (2012) all the external factors namely inflation, interest rate and GDP
have a positive impact on all commercial bank’s return on assets in Malaysia while stock market
development influence bank’s profit negatively. Similar result was also shown by the two sub
samples except that interest rate appears to influence foreign bank’s profit positively but shows no
impact on domestic bank’s performance.

Muhammad and et al (2013) study in Pakistan bank size, net interest margin, and industry
production growth rate has positive and significant impact on the ROA and ROE. Nonperforming
loans to total advances and inflation have negative significant impact on Return on assets while
real gross domestic product has positive impact on ROA. Capital ratio has positive significant
impact on ROE.

Bader and et al (2013) study employed the most widely employed internal and external
determinants of banks profitability in the earlier literature with the aim of recognizing those
determinants that shape the profitability of Islamic banks in Jordan over the period 1997-2006. As
a result they found out that the most important internal determinants were total deposits, cost of
deposits, total expenditures, loans and restricted investment deposits. In particular, it showed a
positive impact for cost of deposits, restricted investment deposits and total loans on the banks
profitability though the impact of total loan is statistically insignificant. On the other hand, a
negative correlation is existed between total deposits, total expenditures and loans on one hand and
on the banks profitability on the second hand. As for the external determinants of profitability of
Islamic banks under study, their findings demonstrate that money supply (M2) and market share
have a significant positive impact on the banks profitability levels. Other external determinants of
profitability are found to have positive but insignificant impact on profitability including the
rediscount interest rate and consumer price index (CPI).

8|Page
According to Sebnem and Benegu (2012) study of factors affecting stock return of firms quoted in
ISE, they found out stock performance, financial performance, financial structure and activity and
profitability ratio as good explanatory variables for stock return but oil prices, econometric growth,
exchange rate, interest rate and money supply can be used in addition.

Qinhua and Meiling (2014) study on the impact of macroeconomic factors on profitability of
china’s commercial banks has shown economic growth, money supply, interest rate and inflation
has positive effect on profitability of china’s commercial banks.

Shista and Hammas (2012) study on profitability of Islamic banks in Malaysia has found out that
GDP and Inflation has positive influence on banks profitability.

Husam and et al (2009) study in Istanbul on the effect of macroeconomic factors on stock return
has concluded that macroeconomic variables like the term structure of interest rate, unanticipated
inflation, risk premium, exchange rate and money supply has significant effect in explaining stock
return but has weak explanatory power.

Turgut and et al(2008) study of macroeconomic factors, APT and Istanbul stock market has found
out that macroeconomic variables such as money supply(M2), industrial production, crude oil price
index(CPI), import, export, gold price, exchange rate, interest rate, GDP, Foreign reserve,
unemployment rate and market pressure index(MPI) has no significant effect on stock return.

Lina (2012) study on the impact of macroeconomic factors on banking industry stock return in
Thai has found out change in inflation, change in growth rate of money supply and exchange rate
has positive significant effect on bank stock return while interest rate has negative significant
impact on bank stock return. But when control variables are entered all has no impact.

In the contrary sadia and nurean (2012) study on impact of macroeconomic factors on banking
index in Pakistan has found money supply, exchange rate, industrial production and short term
interest rate has negative impact on banking index while oil price has positive impact.

Hassan and Bashir (2003) studied the effects of controlled and uncontrolled variables on banks
profitability in Morocco. While factors such as capital, overhead, gross domestic product and

9|Page
conventional interest rates were positively related to profitability; loan ratios, reserves taxes, and
size were adversely related.
Hester and Zoellner (1996) studied the relationship between balance sheet items and the earnings
of 300 banks in Kansas City and Connecticut, USA. They found that changes in balance sheet
items had a significant impact on a bank’s earnings. While all asset items obtained positive results,
liability items such as demand, time and saving deposits adversely affected profits.
Other models

Pan and et al (2014) study of the Impact of Macro Factors on the Profitability of China’s
Commercial Banks in the Decade after WTO Accession found out that economic growth has a
Positive correlation with the profitability of commercial banks, economic growth lead to the
promotion of the profitability of commercial banks. Sign of money supply coefficient is positive,
and it is in line with expectations. This shows that the increase in the money supply will enhance
the profitability of commercial banks. When the central bank shrinks the money supply, the size
of credit will reduce. Commercial banks that take interest income as the main source of income
will face a significant decline in profitability. It can be seen from the coefficient that the impact of
money supply on profitability of commercial banks is the most obvious. Sign of loan interest rate
coefficient is positive. Hence the rise in loan interest rate will increase the profitability of
commercial banks. Because the number of loans is not sensitive to interest rates and loan scale of
commercial banks did not reduce so much. The increase of interest income brought by interest rate
is more than the loss of loans, resulting in the increase of profitability. Sign of the inflation rate
coefficient is positive, inconsistent with expectations, which shows that the rise in inflation rate
increased profits of commercial banks. The two main explanations: On one hand, the decisions of
residents about investment and savings are based on their nominal income. Inflation increases
nominal income, enhancing the wishes of residents to invest and save, thus increasing the profits
of commercial banks; on the other hand, Inflation is expected and commercial banks adjust their
decision according to the expected inflation. Therefore, they made profits. Stock market
capitalization is the least significant because China’s financial market is not perfect and funding
needs are met mainly by financial intermediaries. They made an empirical analysis with a panel of
10 Chinese listed banks during the period 1998-2012 to make a study of the potential impact of

10 | P a g e
external factors may bring to China’s capital market. The model takes Return on Assets as a
dependent variable, and takes GDP, inflation rate, money supply growth, interest rates and total
market capitalization of stock as explanatory variables. The results confirm that macroeconomic
do have a substantial influence to the earning power of commercial Banks. Economic growth,
inflation, interest rates and money supply growth have positive correlations with bank profitability,
while total market capitalization of stock has a negative correlations with bank profitability.
Among these selected macroeconomic variables, influence of money supply growth is the most
obvious.

Nicolae and et al(2015) on the study to assess the main determinants of banks’ profitability in
EU27 over the period 2004-2011using two group of factors that influence bank profitability as
bank-specific (internal) factors and industry specific and macroeconomic (external) factors. They
considered proxy for banks profitability the return on average assets (ROAA) and the return on
average equity (ROAE) and found consistent expected results in Credit and liquidity risk,
management efficiency, the diversification of business, the market concentration/competition and
the economic growth have influence on bank profitability, both on ROAA and ROAE while an
interesting and valuable result is the positive influence of competition on bank profitability in
EU27. They used the Hausman test to select the appropriate estimation method – fixed effects or
random effects. By rejecting the null hypothesis (prob. =0.000 for both dependent variables), it
results that the correct method of estimating the model with fixed effects. Simultaneously with the
panel level fixed effects, the year dummies extract the time effect. They highlight the consequences
on performance of different events that commonly affect all banks in the same moment in time.
They also estimated robust standard errors to ensure that the covariance estimator handles
heteroscedasticity of unknown form.
Christos and Geoffrey (2010) study quantifies how internal determinants (“within effects”
changes) and external factors (“dynamic reallocation” effects) contribute to the performance of the
EU banking industry as a whole in 1994-1998 and construct OLS and fixed effects models and it
provided a new perspective for understanding the impact of changes in competition on the
performance of the EU banking industry. The estimation results suggest that the profitability of
European banks is influenced not only by factors related to their management decisions but also

11 | P a g e
to changes in the external macroeconomic environment. The estimation results in contrast to other
studies made on structure-performance relationship suggested that the profitability of European
banks is influenced not only by factors related to their management decisions but also to changes
in the external macroeconomic environment. Equity to assets ratio has consistently the same sign
and level of significance suggesting that banks with greater levels of equity are relatively more
profitable. The loans to assets ratio appears to be inversely related to banks return on assets. This
implies that banks which have large non-loan earning assets are more profitable than those which
depend more heavily on assets. The funds gap ratio is significantly positive, and the proportion of
loan loss provisions to total loans significantly negative. Also, the results are in contrast to studies
that have examined the structure-performance relationship for European banking and find a
positive effect of the concentration and/or market share variables on bank profitability. In this
study, not only the traditional structure-conduct-performance hypothesis, but also the efficient
hypothesis are not supported. The level of interest rates have a positive effect, while the variability
of the interest rates and the growth of GDP rates negative. In order to test for the empirical
relevance of the hypotheses regarding the causes of bank profitability, they have adopted a multiple
regression framework to analyze the panel data set that has been constructed.
Samy (2003) investigates the impact of bank’s characteristics, financial structure and
macroeconomic indicators on bank’s net interest margins and profitability in the Tunisian banking
industry for the 1980-2000 period. High net interest margin and profitability tend to be associated
with banks that hold a relatively high amount of capital, and with large overheads. Other important
internal determinants of bank’s interest margins bank loans which have a positive and significant
impact. The size has mostly negative and significant coefficients on the net interest margins which
may simply reflect scale inefficiencies. It also found that the macro-economic indicators such
inflation and growth rates have no impact on bank’s interest margins and profitability while
concentration is less beneficial to the Tunisian commercial banks than competition. Stock market
development has a positive effect on bank profitability which reflects the complementarities
between bank and stock market growth. Finally he found that the disintermediation of the Tunisian
financial system is favorable to the banking sector profitability. He used fixed effects as well as
random effects models and conducted a Hausman specification test in order to compare the two
categories of specifications.
12 | P a g e
The paper by Paolo (2011) tried to examine the determinants of the profitability of the US banks
during the period 1995-2007. He combined bank specific (endogenous) and macroeconomic
(exogenous) variables through the GMM system estimator and found a negative link between the
capital ratio and the profitability, which supports the notion that banks are operating overcautiously
and ignoring potentially profitable trading opportunities. It also point to a nonmonotonic
relationship between the capital ratio and profitability, supporting the efficiency-risk and
franchise-value hypotheses. The analysis also records that economies of scale do not occur if one
takes into consideration the size of the bank.
Abdel-Hameed (2003) studied how bank characteristics and the overall financial environment
affect the performance of Islamic banks using bank level data and the study examines the
performance indicators of Islamic banks across eight Middle Eastern countries between 1993 and
1998. Internal and external banking characteristics were used to predict profitability and efficiency
with Controlling for macroeconomic environment, financial market structure, and taxation found
that high capital-to-asset and loan-to-asset ratios lead to higher profitability and foreign-owned
banks are likely to be profitable. In addition, implicit and explicit taxes affect the bank performance
and profitability negatively while favorable macroeconomic conditions impact performance
measures positively. He also indicated that stock markets and banks are complementary to each
other. He formulated a formal model reflecting the relationship between bank performance and
bank’s internal and external indicators. A linear equation, relating the performance measures to a
variety of financial indicators was specified.
The paper by Agela and Adina (2013) investigate the factors that have an influence upon the
profitability of Romanian commercial banks, between 2003 and 2011 and found that Romanian
banks’ profitability is influenced by both bank-specific factors like asset quality, management
quality and banking liquidity and changes in the external environment like banking concentration
and economic growth rate. They used panel data and a multiple linear regression model was issued
to determine the relative importance (sensitivity) of each explanatory variable in affecting the
performance of bank.
Panayiotis and et al (2005) studied the effect of bank-specific, industry-specific and
macroeconomic determinants of bank profitability in Greece using an empirical framework that
13 | P a g e
incorporates the traditional Structure-Conduct-Performance (SCP) hypothesis. As a result show
that profitability persists to a moderate extent indicating that departures from perfectly competitive
market structures may not be that large. All bank-specific determinants, with the exception of size,
affect bank profitability significantly in the anticipated way. However, no evidence is found in
support of the SCP hypothesis. To account for profit persistence they applied a GMM technique
to a panel of Greek banks that covers the period 1985-2001.
Sudin (2004) study to examines the effects of the factors that contribute towards the profitability
of Islamic banks and found that internal factors such as liquidity, total expenditures, funds invested
in Islamic securities, and the percentage of the profit-sharing ratio between the bank and the
borrower of funds are highly correlated with the level of total income received by the Islamic
banks. Similar effects were found for external factors such as interest rates, market share and size
of the bank. Other determinants such as funds deposited into current accounts, total capital and
reserves, the percentage of profit-sharing between bank and depositors, and money supply also
play a major role in influencing the profitability of Islamic banks. He used panel data with the
assumption that all behavioral differences between individual banks are captured by the intercept
and a dummy variable approach which was applied as proposed by Griffiths et al., 1993. A paper
by Constantinos and Voyazas (2009) trying to investigate the effects of bank-specific and
macroeconomic determinants of bank profitability in Greek, using an empirical framework that
incorporates the traditional Structure-Conduct-Performance (SCP) hypothesis have generated
evidence to suggest that for any consistent or systematic size the profitability relationship is
relatively weak. Most of the bank-specific determinants were found to significantly affect bank
profitability. Macroeconomic variables investigated, such as GDP, were found to be highly
insignificant. A panel data approach has been adopted and effectively applied to six Greek banks.
Sub-Saharan Africa Review
Valentina and et al (2009) paper using a sample of 389 banks in 41 SSA countries to study the
determinants of bank profitability found out that apart from credit risk, higher returns on assets are
associated with larger bank size, activity diversification, and private ownership. Bank returns are
affected by macroeconomic variables, suggesting that macroeconomic policies that promote low
inflation and stable output growth does boost credit expansion. The results also indicate moderate
persistence in profitability. Causation in the Granger sense from returns on assets to capital occurs
14 | P a g e
with a considerable lag, implying that high returns are not immediately retained in the form of
equity increases. They used unbalanced panel of SSA commercial banks annual bank and
macroeconomic data for 41 SSA countries over the period 1998–2006 with general linear
regression model.
Munyambonera E.F. (2013) study the determinants of commercial bank profitability in
SubSaharan Africa using an unbalanced panel of 216 commercial banks drawn from 42 countries
in SSA for the period 1999 to 2006. The bank specific explanatory variables like growth in bank
assets, growth in bank deposits, capital adequacy, operational efficiency (inefficiency), and
liquidity ratio as well as the macroeconomic variables like growth in GDP and inflation found to
explain the variation in commercial bank profitability over the study period. The study Used the
cost efficiency model and estimated bank profitability using panel random effects method in static
framework.
James and et al (2014) study to investigate the impact of bank-specific, industry-specific and
macroeconomic indicators on bank profitability in Nigeria over the time period from 1998 to 2012,
using random-effect model and by approximating bank profitability by return on assets (ROA)
return on equity (ROE) and net interest margin (NIM) to find the existence of positive and
significant effect of capital adequacy, bank size, productivity growth and deposits on profitability.
While credit risk and liquidity ratio have a negative and significant effect on bank profits.
However, no evidence is found in support of the effect of industry-specific variables. Finally, as
expected, inflation rate and interest rate are negatively and significantly related to bank
profitability.
Aremu and et al (2013) study applying the econometric analysis of Co integration and Error
Correction Technique sought to find out what factors really determined profitability in the banking
sector of the Nigerian economy using First Bank of Nigeria Plc. as a case study. As contrary to
views of some authors, Bank Size (Natural Logarithm of Total Asset and Number of Branches)
and Cost Efficiency did not significantly determine bank profitability in Nigeria. However, Credit
Risk (Loan Loss Provision-Total Assets) and Capital Adequacy (Equity-Total Assets) was found
to be significant drivers which affected bank profitability both in the long run and short run
respectively. Also, while Liquidity affected bank profitability in the short run, Labor efficiency
(Human Capital ROI and Staff Salaries-Total Assets) only affected bank profitability in the long
15 | P a g e
run. But as for the external or macroeconomic variables which determined bank profitability, only
Broad Money Supply growth rate was found to be a significant driver both in the long run and in
the short run.

East Africa Context Review

While Wvans (2014) study on effects of macroeconomic factors on profitability in Kenya found
out GDP, inflation and exchange rate have insignificant effect on bank profitability.

A research by Evans (2014) on Effect of Macroeconomic Factors on Commercial Banks

Profitability in Kenya indicated that macroeconomic factors (real GDP, inflation and exchange
rate) have insignificant effect on bank profitability in Kenya with Equity bank in focus at 5% level
of significance. The study was modeled on the theory of production and based on correlation
research design. Sample size consisted annual data spanning 5 years from 2008- 2012. Data was
obtained from the World Development Indicators, published Equity bank documents (annual
reports, investor briefings and financial statements). To accomplish the task the study used
CobbDouglas production function transformed into natural logarithm. This study employed OLS
to establish the relationship between macroeconomic factors and bank profitability.

Study by Zawadi (2014) investigates the effects of bank specific and macroeconomic factors on
banks’ profitability in Tanzania. He used fixed effects regression model on a panel data obtained
from 23 banks from 2009 to 2013. The empirical results showed that bank-specific factors (that
are affected by bank-level management) significantly affect banks’ profitability in Tanzania and
macroeconomic factors do not seem to significantly affect banks’ profitability. He concluded that
the profitability performance of banks in Tanzania is mainly influenced by management decisions,
while macroeconomic factors have insignificant contribution.
Ethiopian Context Review
The paper by Tesfaye B. L. (2014) 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. He 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
16 | P a g e
overhead expenses. In addition, he found that bank’s capital and liquidity status are not significant
to affect the performance of banks. On the other hand, he found that bank size and macro-economic
variables such real GDP growth rates have no significant impact on banks’ profitability except the
inflation rate is determined to be significant driver to the performance of the Ethiopian commercial
banks. He used multiple linear regression model with endogenous and exogenous variables
separately first and then combined.
W/Michael and et al (2015) study examined the relationship between leverage and firm specific
(profitability, tangibility, growth, risk, size and liquidity) determinants of capital structure
decision, and the theories of capital structure that can explain the capital structure of banks in
Ethiopia. In order to investigate these issues a mixed method research approach is utilized, by
combining documentary analysis with random and fixed regression models and in-depth
interviews. The study used twelve years (2000 - 2011) data for eight banks in Ethiopia and findings
show that profitability, size, tangibility and liquidity of the banks are important determinants of
capital structure of banks in Ethiopia. However, growth and risk of banks are found to have no
statistically significant impact on the capital structure of banks in Ethiopia and the results of the
analysis indicate that pecking order theory is pertinent theory in Ethiopian banking industry,
whereas there are little evidence to support static trade-off theory and the agency cost theory. They
concluded that banks should give consideration to profitability, size, liquidity and tangibility when
they determine their optimum capital structure.
Summary of Determinant Variables
Different literature have different variables and different classification as determinants of banks
profitability. Amer and et al (2013) study has discovered Inflation, Interest Rate and GDP have
positive impact while stock market Development influence negatively. Muhammad and et al
(2013) has shown size,Net interest margin, Industry Production growth rate and Real GDP has
positive and significant impact on profitability of banks while Non-performing loan ratio and
inflation has shown negative and significant impact. Bader and et al (2013) study in Jordan showed
that cost of deposit interest rate, restricted deposits and total happened to influence profit positively
in banks while total expenditure, total deposit and loan on hand showed negative influence and
market share and money supply with no significant impact.According to Demirguc-kunt and
Huizingha (1999) study of determinants of profitability of banks in 80 countries, they have found
17 | P a g e
that capital and market concentration happened to affect profitability positively while portion of
banking asset to GDP and Stock market capitalization to bank asset has negative impact on
profitability.Quihuaa and Meiling (2014) study in china has found economic Growth, Money
Supply, Interest rate and inflation happened to have positive and significant effect. Shista and
Hammas (2012) study in Malaysia has GDP and inflation as significant variables.Lina(2012) study
showed Inflation, Money supply and exchange rate happened to have positive and significant effect
and Interest rate happen to show significant and negative impact but when control variables
inserted all happen to be insignificant.Hassan and Bashir (2003) study has found capital, overhead
cost, GDP and interest rate as significant and positive impact while loan ratio, reserve taxes and
size happen to have significant and negative impact. Pan and et al (2014) study has shown
Economic growth, money supply, lending interest rate and inflation happened to have positive and
significant impact but total market capitalization happen to have negative and significant impact.
Nicolae and et al (2015) have Credit and liquidity risk, management efficiency, diversification of
business, market concentration and economic growth have influence on banks profitability.James
and et al (2014) study showed Capital adequacy, size, productivity growth and deposit with
positive and significant impact while credit risk and liquidity happened to have negative and
significant impact. Christos and Geoffrey (2010) study has capital adequacy, fund gap ratio, market
concentration and Interest rate to have positive and significant impact while asset, loan loss and
GDP growth to have negative and significant impact on profitability of banks. Samy (2003) study
revealed that Capital adequacy, overhead efficiency and loans happen to have positive and
significant impact, size with negative and significant impact while Inflation and GDP with
noimpact and Market concentration with less impact. Paolo (2011) study have found only Capital
adequacy to have negative impact. Aremu and et al (2013) have shown size, number of branches,
and cost efficiency have shown no significant impact while credit risk and capital adequacy have
shown to have positive impact both in short run and long run but liquidity happen to affect in short
run and labor efficiency in long run. Abdel-Hameed (2003) study have shown positive and
significant impact from Capital adequacy and loan to asset ratio but negative and significant impact
from implicit and explicit tax. Valentia and et al (2009) study has size, activity diversification and
private ownership has shown positive and significant impact. Munyambonera (2013) study has
shown deposit, asset growth, capital adequacy, overhead efficiency, liquidity, GDP and inflation
18 | P a g e
as explanatory variables of banks profitability. Constantinous and Voyazas (2009) study has bank
specific factors as significant and macroeconomic factors as insignificant.

While Wvanss (2014) study in Kenya has found out that GDP, Inflation and exchange rate
happen to have no significant impact on profitability of banks. Evans (2014) study have shown
real GDP, inflation and exchange rate happen to have no significant impact. Zawadi (2014) have
found bank specific factors as significant but macroeconomic factors happen to be insignificant.

Tesfaye (2014)study using simple linear regression has bank specific factors like credit risk
control,diversified income, controlled overhead expenses and inflation had significant impact but
capital, liquidity, bank size and GDP have shown to have been insignificant. W/Michael and et al
(2015) study using panel data of eight banks has revealed size, tangibility and liquidity have been
significant factors of banks profitability while growth and risk have been insignificant factors.

It can be argued that macroeconomic factors significant impact is still in argument but from
international experience and study of Tesfaye (2013) inflation, interest rate and economic growth
happen to affect profitability of banks irrespective of their direction while similar conclusion can
be taken on bank specific factors like capital adequacy, management efficiency and liquidity.

Generally there has been observed gap that almost all of the studies reviewed in Africa has used
panel data instead of time series which might be related to poor data handling history and some of
the studies even use simple linear regression for time series data which lead to spurious result. In
addition, in Ethiopian context there isn’t observed study focused on the market dynamics change
through the period of economic and political change keeping the fact that there is residual impact
of earlier command economy favorable for large and small number of institutions in the industry
but with direction of change due to policy of current economic policy? Therefore this paper will
try to address these issues taking market concentration and other factors gained from this literature
as determinant factors and taking annual time series data for the period from 1973 of commercial
Bank of Ethiopia.

2.2. Profitability Measures

Return on assets is the net profit after tax divided by total assets and indicates the returns generated
from the assets financed by the bank. Devinaga (2010) claims that the use of Return on asset as
19 | P a g e
profitability ratios are not influence by changes in price levels and it is said to be the most
appropriate way of measuring profitability as one make use of time series analysis. This is because
the real value of profits cannot be affected by the varying inflation rates. For one to realize how
well a bank is performing it is much more useful to consider return on assets (ROA) and return on
equity (ROE); Bourke (1989) and Molyneux and Thornton (1992).Therefore, this study has used
the ratio of return on assets (ROA) as a measure of banking industry performance.

I. Return on asset

The return on assets (ROA) (return on total assets, return on average assets) is one of the most
widely used profitability ratios because it is related to both profit margin and asset turnover, and
shows the rate of return for both creditors and investors of the company. Ready ratios describe
Return on assets (ROA) as a financial ratio that shows the percentage of profit that a company
earns in relation to its overall resources (total assets). Return on asset is a key profitability ratio
which measures the amount of profit made by a company per unit of currency of its assets. It shows
the company's ability to generate profits before leverage, rather than by using leverage. Unlike
other profitability ratios, such as return on equity (ROE), ROA measurements include all of a
company's assets – including those which arise from liabilities to creditors as well as those which
arise from contributions by investors. So, ROA gives an idea as to how efficiently management
use company assets to generate profit, but is usually of less interest to shareholders than some other
financial ratios such as ROE. Return on assets gives an indication of the capital intensity of the
company, which will depend on the industry. Capital-intensive industries will yield a low return
on assets, since they must possess such valuable assets to do business. Shoestring operations will
have a high ROA: their required assets are minimal. The number will vary widely across different
industries. This is why, when using ROA as a comparative measure, it is best to compare it against
a company's previous ROA figures or the ROA of a similar company.

What Does Return on Assets (ROA)Mean? Generally, ROA is

An indicator of how profitable a company is relative to its totala ssets. ROA provides an idea of
how efficient management is at using its assets to generate earnings. It is calculated, as shown here,
20 | P a g e
by dividing a company's annua learnings by its total assets, with ROA displayed as a percentage.
Sometimes this is referred to as return on investment.

Calculation

Acording to Stanlet and Geoffrey (2002), there are three major type of Profitability measures.
These are Profit Margin=Net Income/Sales

Return on Asset (investment) =Net income/Total Assets= Net income/Sales*sales/Total Assets

Return on Equity=Net income/stock holders’ equity=Return on assets (investment)/ (1Debit/Asset)

While peter and Sylvia (2008) among different profitability ratios choose the following key
profitability ratios used today are:

Return on equity capital (ROE) =Net income/Total Equity Capital

Return on asset (ROA) =Net income/Total Assets

Net interest Margin= (Interest income-Interest expense)/ (Total Assets)2

Net interest Margin= (Non-interest revenues-Non-interest expenses)/ (Total Assets)2

Net operating Margin= (Total Operating revenues-Total operating expenses)/Total Assets

Earnings per share of stock (EPS) = Net income/Common equity shares outstanding

According to Kent and Gary (2005) define return on asset as ratio measure of net income generated
from each dollar invested in total asset and calculate as

Return on asset (ROA) = Net income/Average total assets

According to Mabwe and Robert (2010), the most common measure of bank performance is
profitability and it is measured using the following criteria:

Return on Assets (ROA) = net profit/total assets

ROA shows the ability of management to acquire deposits at a reasonable cost and invest them in
profitable investments. This ratio indicates how much net income is generated per £ of assets. The
higher the ROA, the more the profitable the bank.
21 | P a g e
Return on Equity (ROE) = net profit/ total equity.

ROE is the most important indicator of a bank’s profitability and growth potential. It is the rate of
return to shareholders or the percentage return on each £ of equity invested in the bank.

Cost to Income Ratio (C/I) = total cost /total income

It measures the income generated per £ cost. That is how expensive it is for the bank to produce a
unit of output. The lower the C/I ratio, the better the performance of the bank.

Of all profitability and performance measures, Return on asset was used in this paper because of
its reduced susceptibility to inflation which could result to spurious correlation.

It is customary to use Return on investment and return on asset inter changeably. Usually financial
accounting books name it as return on investment while financial management books name it as
return on equity. Further there is also a different ways of calculating return on asset. Majorly, their
difference appears on how to use asset in the denominator. But in this paper total asset of current
period by the end of the period is used as in the case of Mabwe and Robert (2010).

As a conclusion

ROA = Net Income after tax / Total assets (or Average Total assets)

However it is important to note that when comparing the Return on Assets of different companies,
ensure that the companies are in the same industry. A bank will have a significantly different return
on assets than a railroad company.

Analysis

It measures how much the firm is earning after tax for each dollar invested in the assets of the firm.
That is, it measures net earnings per unit of a given asset, moreover, how bank can convert its
assets into earnings (Samad & Hassan 2000).

22 | P a g e
2.3. Contradicting findings of determinant variables impact on profitability

Different literatures classify determinants of profit in deferent ways. Some classify them as internal
and external variables. While other classify them as internal, bank specific and external
macroeconomic variables. In general, the literature on banks performance mentioned that the
profitability determinants can be divided in two main categories namely the internal determinants
(i.e. those factors that are influenced by the bank's management decisions and policy objectives)
and the external determinants (i.e. economic and industry conditions). For the conception of this
paper we classify them as broadly as internal and external and further classify internal determinant
variables as financial statement variables and non-financial statement variables while external
determinant variables will be classifies as bank specific variables and macro-economic variables.

2.3.1. Internal determinants

Studies categorize them into two groups namely the financial statement variables and non-financial
variables. The financial statement variables are factors that are directly related to the bank’s
balance sheet and income statement while the non-financial statement variables include factors
like the number of branches of a particular bank, location and size of the bank etc. (Sudin 2004).

Five bank characteristics are used as internal determinants of performance. They are the cost
to income ratio, the ratio of equity to total assets, the ratio of bank's loans to customer and short
term funding or Deposit, Number of branches and the bank's total assets which represent Expenses
Management, Capital Adequacy, Liquidity, Accessibility and Size, respectively.

a.) Capital Adequacy

Capital Adequacy= Capital and reserve/Total Asset

Olivier and et al (2014) paper on the effect of banks’ capitalization on banks’ Return on Equity
(ROE) on a sample of large French banks over the period 1993-2012, controlling for risk-taking
as well as a range of variables including the business model. They found that an increase in capital
leads to a significant increase in ROE, albeit the economic effect is modest and the method chosen
by a bank to increase capitalization (i.e. raising equity) didn’t alter the result. Over the period, we
find some evidence of a negative relationship between the share of credit activities and ROE, which

23 | P a g e
is driven by the 2002-2007 sub-period, characterized by a significant increase in other business
line activities and appears to be driven by an increase in efficiency.

Ikpefan Ochei A. studied the impact of bank capital adequacy ratios, management and performance
in the Nigerian commercial bank (1986 - 2006). In the study, he captured their performance
indicators and employed cross sectional and time series of bank data obtained from Central Bank
of Nigeria (CBN) and Annual Report and Financial statements of the sampled banks. The
formulated models were estimated using ordinary least square regression method. The overall
capital adequacy ratios of the study shows that Shareholders Fund/Total Assets (SHF/TA) which
measures capital adequacy of banks (risk of default) have negative impact on ROA. The efficiency
of management measured by operating expenses was negatively related to return on capital. The
implication was that adequate shareholders fund can serve as a veritable stimulant in strengthening
the performance of Nigerian commercial banks and also heighten the confidence of customers
especially in this era of global economic meltdown that has taken its toll in the Nigerian financial
system.
b.) Liquidity(LQ)
Liquidity in Banks=Loan/Deposit

Gusti (2014) study aimed to determine the effect of Capital and Liquidity Risk To Profitability on
Conventional Rural Bank in Indonesia taking Capital Adequacy Ratio (CAR) or capital risk ratio
and Loan Deposit Ratio (LDR) or liquidity ratio as independent variables and Return on Assets
(ROA) ratio or profitability ratio as dependent variable. The data was secondary data obtained
from the Directory of Bank of Indonesia during the year of 2013. Method used in this research are
Double Linear Regression and results showed that capital risk (CAR) and liquidity (LDR) have a
significant effect on profitability (ROA) on Conventional Rural Bank in Indonesia at significance
level α = 1%.

Étienne and Christopher (2010) study to analyze the impact of liquid asset holdings on bank
profitability for a sample of large U.S. and Canadian banks. Results suggest that profitability is
improved for banks that hold some liquid assets, however, there is a point at which holding further
liquid assets diminishes a banks’ profitability, all else equal. Moreover, empirical evidence also

24 | P a g e
suggests that this relationship varies depending on a bank’s business model and the state of the
economy. They estimated the model using a panel two step GMM procedure with bank and time
fixed effects, in which only the macroeconomic variables are treated as exogenous. To help correct
for endogeneity, all other explanatory variables are instrumented with three lags of themselves.
They also used a kernel based method with automatic bandwidth selection developed by Newey
West 1994 to obtain heteroskedastic and autocorrelation consistent HAC standard errors and
covariance estimation.

c.) Management Efficiency

Management Efficiency=logarithm of Overhead Cost

=logarithm of (Non-interest income/Net profit after Tax)

Seelanatha (2010) study on Market structure, efficiency and performance of banking industry in sir lanka
and found that traditional structure conduct performance argument is not held in the banking industry in Sri
Lanka and the banks performance does not depend on either market concentration or market power of
individual firms but on the level of efficiency of the banking units.

Mecagni and et al (2015) study on Sub-Saharan Africa banks found operational efficiency remains
relatively low, as shown by a high ratio of overhead costs to total assets. In Addition they have
found out that banking systems in Sub-Saharan Africa Low-Income Countries is less efficient than
in Middle-Income Countries.

d.) Accessibility Accessibility=Logarithm of Number of Branches

According to Erna and Ekki (2004) banks usually makes decisions on expanding their branch by
considering different factors. Some of the factors could be; level of competition, deposit potential,
regional income and existence of road and vehicles. There is a trend of high expansion on the
commercial banks in Ethiopia being witnessed in recent years. So, in this paper we will try to
analyze whether this expansion and previous expansions has any effect on profitability.

Beverly (2005) study to assess the implications of thesedevelopments by examining a series of

simple branch performance measures and askinghow these measures vary, on average, across
institutions with different branch networksizes.Their findings suggest that banks with mid-sized
25 | P a g e
branch networks may be at acompetitive disadvantage in branching activities and find no
systematic relationship between branchnetwork size and overall institutional profitability. This
may be because banking organizations optimize thesize of their branch network operations as part
of an overall strategy involving both branch-based andnon-branch-based activities. He used
crosssectional data and descriptive method of analysis using mean and median of variables to
compare across branches.
Kozo and Kazumine (2011) paper to investigate the effects of branch expansion on cost and
profitefficiency for the Japanese regional banks over the period of fiscal year 1999-2009with
regard to performance measures using stochastic frontier analysis (SFA).They found that focusing
on the local activities withoutexpanding branch network is associated with improved cost
efficiency even though regional banks expanding branch network in certain level exhibit higher
cost efficiencywhereas excessive branch expansion causes lower cost efficiency. In contrast,
regional banks focusing on the local activitiesexhibit lower profit efficiency.The findings in this
paper suggest that an adequate levels of branch expansion havepositive impacts on both cost and
profit efficiencies for regional banks through diversifyingbanks’ portfolio and reducing cost of
deposit.
e.) Market Concentration

Market Concentration=logarithm of sum of Top five Banks Asset/Total Banking Industry

Asset

Evgeni (2012) study to explore the impact of various factors (such as market share,concentration
ratio) on profitability measurements of banks in Bulgaria. The analysis is based onbalanced panel
data of 22 banks over the period 2006 to 2010 using return on equity (ROE) as a measure of
profitability. The results show that the relationship between market share and profitability of banks
is positive and statistically significant and there was no statistically significant relationship
between the concentration in the Bulgarian banking sector and its profitability. In other words,
profitability of Bulgarian banks was influenced only by factors related to their management
decisions and not by changes in the external macroeconomic environment. The researcher used
cluster analysis to determine the exact number of banks in the index of concentration and statistical
analysis software “Gretl” was used to perform descriptive analysis.
26 | P a g e
According to Okelue (2012) study on The Structure of the Nigerian Banking Sector and its Impact on Bank
Performance, they found that the Nigerian banking sector is oligopolistic in structure and that market
concentration positively and significantly impacts on bank performance. These results suggest that market
concentration is a major determinant of bank profitability in Nigeria. The structure of the Nigerian banking
sector and thus the performance of banks may be improved if the sector is allowed to exploit the synergistic
effect of market-induced consolidation.

2.3.2. External determinants

The literature suggests that the environment in which banks operate influences them, like any firm.
Therefore, the financial market structure, the economic condition of the country, the legal and
political environment all may influence the performance of the banks. In this study, the
macroeconomic and Industry specific factors are the two sectors to classify the external
determinants. Although competition is considered in the literature as one of the important
determinants of profit for conventional banks, debate in this area has not been fully resolved.
Emery (1971) believed that public regulation, private organization and institutional market
characteristics made industry performance insensitive to differences in market structure and made
competition difficult to observe. In view of the difficulties of measuring the impact of competition,
most banking researchers prefer to incorporate this aspect within the scope of market structure or
regulations. They performed fixed effects regressions at the bank level. Standard-errors are
corrected for heteroscedasticity using Hubert/White standard errors. They included in turn our
lagged values of capitalization measures.

a.) Real Gross domestic product (RGDP)

It is among the most commonly used macroeconomic indicators, as it is a measure of total

economic activity within an economy. GDP is expected to have an effect on numerous factors
related to the supply and demand for loans and deposits. A positive relation is expected between
the performances of the banks.

Tomola (2013) study investigates the effects of bank capital, bank size, expense management,
interest income and the economic condition on banks’ profitability in Nigeria. The fixed effects
regression model employed on a panel data obtained from the financial statements of 20 banks in
the period of 2006 to 2012. The results indicate that improved favorable economic condition
27 | P a g e
contribute to higher banks’ performance and growth in Nigeria. He used both descriptive and
econometric analyses. The descriptive approach was used to analyze the means and further shows
the normality of the distribution. A preliminary estimation of the correlation coefficients of the
variables was carried out in order to determine the explanatory variables that would finally appear
in the regression model. The econometric approach examines the main factors affecting banks’
profitability in Nigeria by applying mixed effects model.
Paul Kupiec and Yan Lee (2012)
b.) Inflation (INF)
Another important macroeconomic condition, which may affect both the costs and revenues of
banks, is the inflation (INF). As Staikouras and Wood (2003) point out that inflation may have
direct effects (e.g. rise in the price of labor) and indirect effects (e.g. changes in interest rates and
asset prices) on the profitability of the banks. According to Perry (1992), the effect of inflation on
bank performance depends on whether the inflation is anticipated or unanticipated. In the former
case (i.e. anticipated inflation) the interest rates are adjusted accordingly resulting in revenues,
which increase faster than costs, with a positive impact on profitability. In the latter case (i.e.
unanticipated inflation) the banks may be slow in adjusting their interest rates, which results in a
faster increase of bank costs than bank revenues that consequently have a negative impact on bank
profitability. There are four variables lead to inflation: employment, consumption, production and
unexpected increase in money supply.

Waseem and et al (2014) study was directed to verify the impact of inflationary trends on the top
rated banks in Pakistan and return on assets (ROA), return on equity (ROE) and net interest margin
as key performance indicators of banking sectors are selected as variable. Researchers calculate
the figures of these variables and then discussed the resulting figures with bank representatives.
The research sample consists of large banks in Bahawalpur district. Through discussion and
calculated results, a strong positive relation has been found among the variables, i.e. inflation over
bank's performance. The limitation of the study is that data of limited years have been taken the
due to the unavailability of data and time constraint as well as only banks of Bahawalpur district
considered.

28 | P a g e
John (2000) study indicates that there is a significant, and economically important, negative
relationship between inflation and both banking sector development and equity market activity.
Further, the relationship is nonlinear. As inflation rises, the marginal impact of inflation on banking
lending activity and stock market development diminishes rapidly. Moreover, we find evidence of
thresholds. For economies with inflation rates exceeding 15 percent, there is a discrete drop in
financial sector performance. Finally, while the data indicate that more inflation is not matched by
greater nominal equity returns in low-inflation countries, nominal stock returns move essentially
one-for-one with marginal increases in inflation in high-inflation economies.
F. Lajeri and J. Dermine (1996) paper on the impact of unexpected inflation on the stock returns
of a sample of French banks. It offers an empirical test of theories that have predicted an impact
of inflation on the stock returns of banks. The paper complements a large literature that has focused
exclusively on the impact of unexpected interest rates. The analysis provides empirical support to
the hypothesis that, in period of volatile inflation, there exists an inflation risk factor which is
independent of the well documented interest rate factor. Three-factor APT model was used to test
empirically the joint sensitivity of rates of return of common stocks to market, interest rate and
inflation factor. The three-factor model is assumed to apply both to banks and non-financial firms
traded on the Paris stock exchange.

29 | P a g e
 c.) Interest rates
Interest rate is one of the important macroeconomic factors which are directly influence to
economic developing. Generally, interest rate is considered as the cost of capital, it means that the
price paid for the use of money in a period of time (Joseph and Vezos, 2006). Vaz, Ariff and
Brooks (2008) get the result Australian bank stock returns are not negatively impacted by the
announced increase in official interest rate. Choi, Elyasiani and Kenneth(1992) get the result that
interest rate has an important impact on bank stock return because it is a factor for the valuation
of common stock of financial institutions while the returns and costs of financial institutions are
directly dependent on interest rate.
There is a negative influence on bank stock return by interest rate change and the sensitivity of
interest rate on bank stock return is different over the time. (Kwan,1991). Yourougon (1990) point
out interest rate has a significant impact on common stock of financial institutions, including
banks. Akella and Chen (1990) said that bank stock returns just sensitive to long-term interest rate
but not to short-term interest rate. However, Mansur and Elyasiani (1998) find out whatever
longterm, medium-term or short-term interest rate has significant affect to bank stock returns.
Mahmudul (2009) interest rate has significant negative relationship with share price, changes of
interest rate and changes of share price both determined by time series and panel regressions.
Kasman, Vardar and Tunc (2011) pointed out interest rate volatility is a main determinant in the
bank stock returns volatility.
2.4. Theoretical frame work
From the literature review we can observe that there are factors affecting profit return of
commercial banks individually and as industry. These factors can be categorized in to two groups:
internal and External. For this study we categorize the internal factors as industry level and bank
specific.

Page
Independent Variable:
Macro level

- Inflation rate
- Interest rate
- Economic Dependent Variable
growth
28 |
Bank Profit

Return on Asset (ROA)

Industry level

- Overhead Cost
- Liquidity
- Capital
Adequacy
- Market
Concentration

Figure 2.1: Conceptual Framework for impact of macro and Industry level factors on Profit
Return of commercial banks in Ethiopia

31 | P a g e
 CHAPTER THREE

RSEARCH METHODOLOGY AND DATA COLLECTION

3.1. Data Collection

This paper will use Secondary data to analyze the impact of external macroeconomic factors like
Interest rate, GDP, money supply, Exchange rate and Inflation and Internal factors like Capital
Adequacy, liquidity, Overhead Cost, Market Share and size as independent variables taking profit
of the commercial banks as dependent variable.

Primarily individual variables are assessed in the banking industry to take an overview of the trend
on the banking industry. Then after, Commercial Bank of Ethiopia in annual time series over a
forty (40) year period ranging the time 1974 to 2013 is used in the paper. Data is taken and assessed
using both qualitative and quantitative techniques. The qualitative technique showed the functional
and systematic approach to understand theoretical relationships between banks profit and different
macro and micro economic variables. This approach is used to provide an analytical framework
for understanding factors which influence commercial bank profit. Each factor is analyzed in the
light of theories and how does actual banks profit are affected by these factors. The quantitative
approach involves the use of regression analysis in estimating the relationship between banks
profit and variables that come out as its determinants or explanatory variables.

3.2. Variables Selection, Description and Measurements

As financial intermediaries; banks profit and stock return is affected by many macro and micro
economic factors like GDP, Exchange rate, Money supply, per capita income, inflation etc.

This paper will use Secondary data to analyze the impact of external macroeconomic factors like
Interest rate, GDP, money supply, Exchange rate and Inflation and Internal factors like Capital
Adequacy, liquidity, Overhead Cost, Market Share and size as independent variables taking profit
of the commercial banks as dependent variable.

32 | P a g e
Table: 3.1 Variables Description
Variables Formula Expected r/n
description (+/-)
Dependent
Variables
ROA Return on Assets= Net profit/ Asset
ROE Return on Equity= Net profit/ Equity
Independent
Variables
Bank Specific
(Internal
Factors)
Capital adequacy Capital Adequacy= Equity / Total Assets +

Management Efficiency= Non-Interest Cost/ Total Income -

efficiency
Liquidity Risk Liquidity Risk= Loans/ Customer Deposits -

Market Market Concentration = ∑ Top five Banks Asset/∑Total +

Concentration Banking Industry Asset
Macroeconomic
factors
(external):
inflation Inflation= CPI growth (annual %) -

Growth Economic Growth= GDP growth rate (annual %) +

Interest Rate Interest Rate= Minimum Deposit Interest Rate -

The bank profit is the dependent variable, while the above variables represent the independent
variables. Koop (2006, p.49) argues that the most important tool applied economists use to
understand the relationship is regression analysis among two or more variables particularly in the
33 | P a g e
case where there are many variables and the interactions between them are complex. Accordingly,
the regression analysis technique has been chosen.

The study used annual time series data collected from NBE and CBE. The time series data gained
from national bank is used in the descriptive and comparative analysis while the data from
commercial bank of Ethiopia was used in Co-integration analysis. The variables used in the study
are Return on Asset=Net Profit/Total Asset, Liquidity=Loan/Deposit, Capital
Adequacy=Capital/Total Asset, Accessibility=No. of Branches, Size=Total Asset, Market
Share=Bank Asset/∑Total Banking Industry Asset, Gross Domestic Product, Consumer Price
Index, Money Supply (broad), lending Interest Rate.. The variables, its unit of measurement and
representation are shown in table 4.1 below.

Table 3.2. Variable definitions and Measurement

Definition Unit
Variables
ROA Return on Asset Percentage
LQ Liquidity Percentage
OV Overhead Cost Percentage
CA Capital Adequecy Percentage
AC Accessibility In number

SI Size In millions of birr

MSh Market Share Percentage
MC Market Concentration Percentage
GDP Gross Domestic Product, Percentage
CPI Consumer Price Index Percentage
MS Money Supply In millions of birr
MLIR lending Interest Rate Percentage
Dependent Variables

34 | P a g e
In the study, the ROA is used as dependent variable. The variables mentioned in table above are
used as explanatory variables. The above independent variables are determinant of the profitability
of commercial banks.

Management Efficiency

The following independent variables and their hypothesis are proposed to increase our
understanding of the determinant factors of ROA in commercial banks. These variables are
determined by detailed reviewing the literatures.

Liquidity

Theoretical and empirical evidence suggests that, liquidity can affect profitability of banks profit
growth. If there is a liquidity problem in the bank it can affect profitability of the bank negatively.

H0:There is no significant relationship between liquidity and commercial bank profit

HA: There is a significant relationship between liquidity and Commercial bank profit.

Cost is the ratio of operating expense to total expense and it’s used to measure managerial
efficiency as proxy. As many theoretical and practical studies showed that high overhead cost can
have negative impact on banks profitability.

H0:There is no significant relationship between overhead cost and commercial bank profit HA:
There is a negative significant relationship between overhead cost and Commercial bank profit.

Interest rate

In essence, the deposit rate is the interest rate that a bank pays the depositor for the use of their
money for the time period that the money is on deposit. Deposit interest rates can be either fixed
for a certain period of time with a minimum amount of money on deposit, or it can be variable,
which fluctuates and is not usually subject to early withdrawal penalties. Lending interest rate is
35 | P a g e
a rate which a bank requires from loan. As lending interest rate increases, the bank may earn higher
profit whereas borrowers may not be initiated to take loan from the bank and which in turn can
affect banks profitability.

H0:There is no significant relationship between lending interest rate and bank profit
HA: There is a significant relationship between lending interest rate and bank profit.

Capital Adequacy

Capital Adequacy is quoted as capital per unit of total asset of banks. The larger the bank’s capital
the higher profitability and capital adequacy is positively correlated with return on asset.

H0:There is no significant relationship capital adequacy and bank profit HA:

There is a significant relationship between capital and bank profit.

Branch expansion
Branch expiation is opening new branches or service outlets in and outside the country. According
to M.A.Baqui et al (1987, there is a relationship between commercial banks profit and commercial
bank’s branch expansion. Profit is influenced by branch expansion and expansion of bank
branches is also influenced by the level of profit in any area. Banks usually makes decisions on
expanding their branch by considering different factors.

H0:There is no significant relationship between branch expansion and bank profit HA:
There is a significant relationship between branch expansion and bank profit.

Accessibility

H0: There is no significant relationship between branches Accessibility and bank profit.
HA: There is a significant relationship between accessibility and bank profit.
36 | P a g e
3.3. Model Specification
The Researcher has chosen to develop multiple variable linear regression model using co
integration and static unit root test as statistical instrument to analyze the impact of the selected
determinants on profitability and the reason is that many researchers like William et al (1994),
Molyneux et al (1994), P. I. Vong et al (2009), Karkrah and Aaron Ameyaw (2010) etc, used linear
regression model as a tool for the analysis in their studies on the subject. Also, Short (1979) and
Bourke (1989) in their studies consider several functional forms and arrived at a conclusion that it
is appropriate to use linear regression model in the analysis of cross-section time series data
because the result it produce is as good as any other functional forms; P. I. Vong et al (2009).
Theresearcher has Chosen to use eviews7 as per the current preference for time series analysis
tool.

The theoretical literature discussed above suggests that bank profit, Return on asset liquidity,
Overhead Cost, Capital Adequacy, Accessibility, Size, Market Share, Market Concentration,
Gross Domestic Product, Consumer Price Index, Money Supply (broad), lending Interest Rate,
somehow, related. As a result, the study uses the following determinant variables:

Liquidity( LQ), overhead cost(OV), capital adequacy(CA), accessibility(AC), market

share(Msh), size(SI), GDP, inflation(CPI), money supply(MS), and interest rates on lending
(Mlir). Based on the above explanation, the models are formulated as follows:
𝐷 = f(LQ, OV, CA, AC, MSH, SI, GDP, CPI, MS, MLIR) … … … … … … … … … … . . … … … … … … .
.4.1

Where; D is Return on Asset of commercial bank of Ethiopia. The equivalent equation which will
be used for estimation can be written in logarithmic form as follows:

𝑅𝑂𝐴 = β0 + β1LQ + β2OV + β3CA + β4AC + β5MSH + β6SI + β7GDP + β8CPI

+ β9MS+β10MLIRI + εt … … … … … … … … . .4.2

Where, εt is the error term and β0 is the constant term, β1, β2, … β10 are slope coefficients.
Regression Coefficients (to be estimated) measures how much units of profit (ROA) would be
changed with a unit change in the independent variables and εt is error term.
37 | P a g e
3.4. Estimation Techniques
In studying the determinants of banks profit, the study uses advanced techniques in time series
econometrics. These techniques are co-integration and error correction method, which are carried
on within the vector auto regression (VAR) framework. The first step of the analysis, using the
Augmented Dickey-Fuller (ADF) test, is to test for the presence of unit roots of the variables in
the system. After the stationary test is examined, we can conduct a co-integration test. If
cointegration is found, a vector error correction model (VECM) is constructed. However, if there
is no co integration, the analyses will be based on the regression of the first differences of the
variables using a standard VAR model. In a VAR model, each variable is explained by its own
lagged values and the lagged values of all other variables in the system. A vector autoregressive
process of order k or VAR (k) for a system of ‘m’ variables can be written in the following matrix
form

The term autoregressive is due to the appearance of the lagged value of the dependent variable and
the term vector is due to the fact that we are dealing with a vector of two or more variables. There
are no exogenous variables in the model. In a VAR model, several endogenous variables are
considered and each endogenous variable is explained by its lagged and the lagged values of all
other endogenous variables in the model. In general, a VAR model expresses current values of the
endogenous variables solely as a function of lagged values of all endogenous variables in the
system.

3.4.1. Unit Root Tests/ Stationary Rate

For time series analysis, the variables are expected to be stationary with a mean of zero and
constant variance. In order to examine their stationary, the Augmented Dickey-Fuller test is used
to test the null hypothesis of non-stationary or unit root. A rejection of the null hypothesis indicates
that the series is not stationary at level and therefore requires differencing either in the first order
or second order to achieve stationary. The logarithm values of the time series data was taking
before Ordinary Least Square (OLS) techniques are used for estimating a model for bank deposits.
38 | P a g e
The logarithm is used in the model in order to transform the non-linear data into linear form. All
variables in the system have to be stationary in the VAR model before estimation. Therefore, it is
necessary to test the stationary of each data series. Under the ADF test, the null hypothesis of a
unit root, H0: b1 = 0 (unit root), is tested using the following specification:

The original level data and the first-differenced level data are both tested for unit roots. If the test
statistics (t-ratio) is greater than the critical values given in Fuller (1976), the null hypothesis is
rejected and the data is said to be stationary.

3.4.2. Co integration Tests

The concept of co integration was introduced by Granger (1986) and further developed by Engle
and Granger (1987). Co-integration implies that the series do not drift too much apart and are tied
together by some long run equilibrium relationship. When the series are co integrated, there is no
need to difference the variables. Contrary, other techniques require differencing the variables in
order to achieve stationary, which involves a loss of potential information about long-run
relationships among the levels of variables. Hence, co integration analysis is able to capture these
relationships, which are otherwise lost when other techniques are used.

A multivariate test for co integration developed by Johansen (1988) and Johansen and Juselius
(1990) is used in this study. The Johansen-Juselius (JJ) procedure of co-integration test is based
on the maximum likelihood estimation of the VAR model. The test is carried out through a VAR
system such as follows:

𝐷𝑡 = 𝐵1𝐷t−1 + 𝐵2𝐷t−2 + 𝐵1𝐷t−3 + ⋯ + 𝐵k𝐷t−k + α + 𝑉t … … … … … … … … . … … … … 4.7

t= 1, ----, T

where Dt is a (n × 1) vector of I(1) variables; βi are (n × n) matrices of parameters; α is a (n × 1)

vector of constant; υt is a vector of normal log distributed error with zero mean and constant
variance; and k is the maximum number of lag length processing the white noise.

39 | P a g e
The trace and maximum eigenvalue statistics are calculated to test for the presence of r
cointegrating vectors. The trace statistics (λ trace) tests the null hypothesis that there are at most r
co-integrating vectors against the alternative of r or more co-integrating vectors. The λ trace for
the null hypothesis of at most r co-integrating vectors is

The maximum eigenvalue statistic (λmax) for the null hypothesis of r co-integrating vectors against
the alternative of r + 1 co-integrating vectors is

𝜆max(𝑟, 𝑟 + 1) = −𝑇ln(1 − 𝜆r+1) … … … … … … .4.9

Where, 𝜆j is the estimated values of the characteristics roots obtained from the П matrix and T is
the number of usable observations

3.4.3. The Vector Error correction Model

Engle and Granger (1987) showed that co-integration implies, and is implied by, the existence of
an error correction term. This means that changes in the dependent variable are a function of the
level of disequilibrium in the co-integrating relationship (captured by the error correction term) as
well as changes in other explanatory variables. Once the variables are found to be co-integrated, a
vector correction model (VECM) will be used to investigate the dynamic interactions among them
in the system. The Granger representation states that for two co-integrated variables, an ECM can
be found in the following form:

𝛥𝑌𝑡 = B0+𝐵1𝛥𝑋t + 𝐵2 t−1 + ⋯ + 𝑉t … … … … … … … … 4.10

Where, єt-1 represents the error correction term which captures the adjustment toward the long run
equilibrium and β2is the short run adjustment coefficient.

A principal feature of co-integrated variables is that their time paths are influenced by the extent
of any deviation from long-run equilibrium. Hendry and Richard (1983) argued that ECM captures
the dynamics of the system whilst incorporating the equilibrium suggested by economic theory.

40 | P a g e
The appeal of the ECM formulation is that it combines flexibility in dynamic specification with
desirable long run properties (Dolado et al., 1990).

3.4.4. Diagnostic Tests

Under the ordinary least squares estimation (OLS) of regression models, the assumptions of no
serial correlation of the error terms as well as a constant variance of the error terms are held. The
Breusch-Godfrey test for serial correlation and the Breusch-Pagan / Cook-Weisberg were used to
test for hetero-skedasticity. If both tests fail, a robust estimator of the covariance will be applied
to correct for the presence of serial correlation and heteroskedasticity.

41 | P a g e
 CHAPTER FOUR

DATA PRESENTATION AND DESCRIPTIVE ANALYSIS

The data is collected from National Bank of Ethiopia, Commercial Bank of Ethiopia, Construction
and Business Bankthrough direct contact and from World Bank Reports and International
Monetary Fund reports web sites. This data collected is managed to be presented in same
currencies of Ethiopia birr and same denomination at least in a single variable presentation except
GDP. To present the data collected, the researcher used tables and graphs with explanations. The
data presentation will be categorized in three groups due to their nature of ownership and size.
Private banks will be presented in one group since they have more or less of similar nature while
commercial bank of Ethiopia data and construction and business bank data will be presented
separately due to their similarity of their ownership being public (which will have adverse effect
in target, direction and way of functioning) as compared to other private banks but they have huge
difference in size. Here it must be noted that the 2014 data for commercial bank of Ethiopia is not
presented due to non-availability until this paper is published.

Table 4.1. Banking Industry Data 2014 profit in rank

DB 1,063.71
UB 763.23
AIB 618.27
BOA 447.42
WB 304.90
NIB 297.37
ZB 183.88
OIB 153.87
LIB 96.58
BUIB 79.96
AB 57.60
BIB 45.01
ADIB 44.66
EB 25.98
42 | P a g e
 DGB 6.04
Table 4.1. Net profit of Private Banks in 2014

When we look at the 2014 profit after tax of private banks, Dashen Bank leads with more than a
billion profit and follows United bank with great margin of three hundred million birr between
them to gain more than seven hundred million birr and follows Awash international bank with a
bit above six hundred million birr.

4.1. Profitability

4.1.1. Net Profit

Graph 4.1. Profit trend of Commercial Bank of Ethiopia between 1990 and 2013

Commercial bank of Ethiopia profit taking from 1990 to 2013 has shown steady or with constant
secular trend up until 2005 where it started high growth rate. It had exhibited a mean profit of more
than 1.25 billion birr per year with average growth rate of 263.9 million birr per year. Its profit
had standard deviation of 1.76 billion birr which is explained with steady growth after 2005 to
2013.
Number of Standard Average
Net Profit Total Sum Observatios Mean Deviation(Sx) Variance(бx) Growth Rate
CBE 30045.98648 24 1251.916 1762.231 3105458.289 263.88
Table 4.2 Statistical variables for Profit trend of Commercial bankof Ethiopia

43 | P a g e
4.1.2.Return on Asset

Graph 4.4. Trend of Return on asset for Private Banks collectively and CBB and CBE individually

The return on Asset of all banks showed linear with acute angled secular trend havinglargest
deviation of 2002 loss exhibited by commercial banks of Ethiopia. Commercial Bank of Ethiopia
and construction and business bank has exhibited average 0.022 and 0.018 birr on every one birr
of assetutilized every year respectively. They have an average growth of 0.117 birr and 0.136 birr
per singe birr of asset utilized with standard deviation of 0.0153 birr and 0.012 birr per one birr of
asset respectively. While private banks has exhibited average return on asset of 0.021 birr per
every single birr of asset utilized with standard deviation 0.008 birr per one birr asset and average
growth of 0.084 birr per one birr asset.
Average
Number of Standard Growth
ROA Total Sum Observations Mean Deviation(Sx) Variance(бx) Rate(%)

CBE 0.533775449 24 0.022241 0.015368 0.000236166 0.1170

Table 4.2. Statistical variables for Return on asset trend of commercial bank of Ethiopia

44 | P a g e
4.2. Liquidity

4.2.1. Loan

Graph 4.5. Commercial Bank of Ethiopia loan trend for the year 1990 to 2013

The loan trend of Commercial Bank of Ethiopia showed constant and slow growth up until 2004
but has experienced dramatic growth afterward until a down fall of 2012. It had experienced an
average loan of birr 19.27 billion birr with average growth rate of 2.99 billion birr and standard
deviation of 24.8 billion birr.
Average
Number of Standard Growth
Loan Year Total Sum Observations Mean Deviation(Sx) Variance(бx) Rate
1990-
CBE 2013 462403.9385 24 19266.83 24805.4 615308028 2,988.71
Table 4.4. Statistical variables for Loan trend of commercial bank of Ethiopia

45 | P a g e
4.2.2. Deposit

Graph 4.8. Deposit trend of Commercial Bank of Ethiopia during the period of 1990 to 2013

CBEs Deposit unlike the loan trend has steady and exponential growth structure though out with dramatic
growth and growth rate changes in late periods after 2010 and onwards. It had shown an average of 31.38
billion birr every year with 6.44 billion birr growth rate and standard deviation of 37.22 billion birr.
Average
Number of Standard Growth
Deposit Year Total Sum Observations Mean Deviation(Sx) Variance(бx) Rate
1990-
CBE 2013 753235.0051 24 31384.79 37222.57 1385519379 6,443.39

Table 4.5. Statistical variables for Deposit trend of commercial bank of Ethiopia

46 | P a g e
4.2.3. Liquidity Ratio
Liquidity Ratio=Loan to Deposit Ratio

Graph 4.11. Liquidity ratio trend of Banks in Ethiopia

The liquidity of commercial banks in Ethiopia has experience deferent characteristics (with
declining behavior being experienced by private banks and CBB which could be driven by profit
orientation and increasing loan demand in relation to expanding investment while CBE showed
growth in liquidity that could be driven by the requirements) until they form unanimous rate in
2012 on wards being in the range of 0.4 and 0.6. CBE liquidity ratio has been on average 0.52 with
0.01 growth rate per year; and 0.23 standard deviation. CBB had an average liquidity of 0.9 with
declining rate of 0.08 per and standard deviation of 0.33. Private Banks liquidity has been on
average 0.75 with declining rate of 0.03 per year and standard deviation of 0.17. There is no
unanimous trend experience in the world. For example in USA alone it ranges from 56% to 170%
(FDIC report,2008, Investopedia.com) while china has proposed to end 75% ratio cap in
2015.(Bloomberg business, June 24,2015) But we could observe that currently Ethiopian banks
have the lowest as compared to these countries. Which in turn means low credit provision and
could grow with credit culture and centralized identity and credit information system.

47 | P a g e
 Number Averag
of e
Liquidity Observa Standard Growth
Ratio Year Total Sum tions Mean Deviation(Sx) Variance(бx) Rate
1990-
CBE 2013 12.56097278 24 0.523374 0.231124 0.053418074 0.01
2000- -
CBB 2013 12.57404047 14 0.898146 0.326437 0.106560983 0.08
Private
Banks Net
profit After
Taxin
Million 1995- -
Birr) 2013 14.26838745 19 0.750968 0.169682 0.028791887 0.03
Table 4.6. Statistical variables for liquidity trend of commercial banks in Ethiopia

4.3. Capital Adequacy

4.3.1. Size of Banks

Graph 4.12. Trend for size of commercial Bank of Ethiopia

The CBE asset has been growing through the years from 1990 to 2013 with sharp growth rate
increase experienced in 2011. It had experienced an average asset size of 41.86 billion birr with
average growth rate of 8.35 billion birr per year and standard deviation of 49.1 billion birr.

48 | P a g e
 Average
Number of Standard Growth
Total Asset Year Total Sum Observatios Mean Deviation(Sx) Variance(бx) Rate
1990-
CBE 2013 1004579.515 24 41857.48 49097.66 2410579780 8,350.23
Table 4.8 Statistical variables for commercial banks in Ethiopia

4.3.2. Capital

Graph 4.15. Capital trend of commercial Bank of Ethiopia

CBE capital has been so low and with minimal growth rate up until 2006 where it has shown
dramatic growth in 2007 and stable but exponential growth afterwards. It had experienced an
average asset of 2.35 billion birr with growth rate of 388.71 million birr per year and standard
deviation of 2.63 billion birr.

Average
Number of Standard Growth
Capital Year Total Sum Observatios Mean Deviation(Sx) Variance(бx) Rate
1990-
CBE 2013 56350.4469 24 2347.935 2631.548 6925042.534 388.71
Table 4.9 Statistical variables for capitals of commercial bank of Ethiopia

49 | P a g e
4.3.3. Capital Ratio

Graph 4.18. Capital Ratio trend of Commercial Banks in Ethiopia

The capital ratio trend of banks show more or less the same trend of stationary behavior with close
to stagnant secular trend. Of the banks CBE has been having low capital adequacy with less than
10 percent. While others have been having adequate capital ratio in the range of 6% and 12% for
CBB and 8% and 14% for private banks. CBE had an average capital ratio of 4.9% with average
growth of 0.11% and standard deviation of 2.3%. CBB experienced 8.83% average capital ratio
with 0.22% growth rate per year and1.7% standard deviation. Private Banks has been having
average 11.7% capital ratio with 0.12% growth rate and 1.7% standard deviation collectively.
Average
Number of Standard Growth
Capital Ratio Year Total Sum Observatios Mean Deviation(Sx) Variance(бx) Rate
1990-
CBE 2013 1.178345956 24 0.049098 0.023171 0.000536901 0.0011
2000-
CBB 2013 1.237084948 14 0.088363 0.016573 0.000274677 0.0022
Private Banks
Net profit After
Taxin Million 1995-
Birr) 2013 2.225314098 19 0.117122 0.017236 0.000297075 0.0012
Table 4.10. Statistical Variables for Capital Ratio of Commercial Banks in Ethiopia

50 | P a g e
4.4. Market Structure
Average
Market Number of Standard Growth
structure Year Total Sum Observatios Mean Deviation(Sx) Variance(бx) Rate
Market 1990- -
Concentration 2013 2234.021198 24 93.08422 7.486841 56.05278812 0.72
CBE Market 2000- -
Share 2013 19.34214172 24 0.805923 0.157089 0.024677039 0.02
Table 4.12. Statistical Variables for Market Structure of Commercial Banking Industry in Ethiopia

4.4.1. Market Concentration

Graph 4.19. Market Concentration trend of Commercial Banks in Ethiopia

As the Ethiopian economy being through command economy for seventeen years,its impact is yet
observed in Ethiopian baking industry with 93% concentration between top five banks through the
period of 1990 and 2013. But it has shown average decline of 0.72% per year and standard
deviation of 7.49%.

51 | P a g e
4.4.2. Market Share

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%

Private Banks Market Share CBE Market Share CBB market Share

Graph 4.20. Market Share trend of Commercial Banks in Ethiopia

As we explained earlier, in relation to previous political structure, commercial bank has controlled
the majority of the market until recently. It had an with average market share of 80.59% with
standard deviation of 15.7% but it has shown an average declining trend 0.02% per year during
the period of 1990 to 2013. CBB has been controlling only 2.95% of the market on average with
0.6% standard deviation and insignificant decline of 0.001% in the period of 2000 to 2013. Private
Banks has been sharing the industry market of average 22.34 between them. They have shown a
dramatic increase in market share through the period of 1995 to 2009 to reach 39.4% from entrance
of monopolistic market. But then after, CBE started to revive and regain the dominance again
growing the monopolistic nature of the market. Private Banks have shared a market share of
22.34% with standard deviation of 0.13% and average growth rate 0.02% irrespective of the
reviving dominance of CBE after 2010.

NB: This is average of their market share they hold during their respective years of existence.

52 | P a g e
4.5. Branch Network
Branch Network=Number of Branches

Graph 4.21 Trend of Commercial Bank Branch Network

Number of Standard
Branch Network of CBE Year Total Sum Observatios Mean Deviation(Sx) Variance(бx)
NO. OF Branches 1990-2013 5202 24 216.75 1084.691982 1176556.7
Number of New
Branches 1991-2014 687 24 28.625 143.2494025 20520.3913
When we come to CBEs branch network trend, it has been stagnant through the years of 1990 to
2010. But afterwards it has started to work aggressively on the expansion of accessibility which is
also reflected in the regain of market share in the industry. CBEs average branch expansion up
until 2010 was 3.75 while it has grown to 159 new branches per year on average in the following
years. By doing linear regression between ROA as profitability measure and Branch Network, we
found out that capital ratio express 17.6% of CBEs profit return. Therefore, we can conclude that
it has insignificant effect at all.

53 | P a g e
 CHAPTER FIVE

ECONOMETRIC DATA ANALYSIS AND ESTIMATION

5.1. Test of stationary

If the data is Non stationary, it’s often regarded as problem in empirical analysis. Estimating taking
non stationary variables lead to spurious regression results and from which further inference is
meaningless. Hence, the first step from time series analysis is to carry out unit root test on the
variables. Unit root test examines that whether the data series is stationary or not. The
conventional Dickey Fuller (DF) and Augmented Dickey Fuller (ADF) test were used with and
without a trend. The null hypothesis for the test claims that the data series under investigation has
unit root. On the other hand, the alternative hypothesis claims that the series is stationary. The
result of the test for the variables at their first difference is presented in table 5.1.Below
respectively.
Test Statistic Under Different Assumptions
Variable ADF test statistic Critical Value at 5% Level of Order of
First difference Significance Integration
ROA -6.916057 -3.533083 I(1)
LQ -5.092943 -3.529758 I(1)
OV -7.372159 -3.533083 I(1)
CA -6.206169 -3.533083 I(1)

AC -3.782258 -3.529758 I(1)

SI -6.673303 -3.533083 I(1)
MSh -2.920014 -3.529758
MC -6.897651 -3.533083 I(1)
GDP -10.21635 -3.536601 I(1)
CPI -5.543013 -3.529758 I(1)

MS -2.163956 -3.533083

ALIR -6.507336 -3.529758 I(1)

IRM -8.530901 -3.529758 I(1)
MDIR -5.823032 -3.529758 I(1)
ROE -6.904535 -3.533083 I(1)
54 | P a g e
 Table 5.1 Unit root test of dependent and independent variables with 5% level significance
The above variables are taken in to the natural logarithms. The absolute values of the calculated
test statistics for all variables are less than its critical value at 5 per cent level of significance. The
result indicates that all variables are non-stationary at level 1, i.e., the series appears to have unit
root. So the null hypothesis that each variable has unit root cannot be rejected by the ADF test.
However, after applying the first difference, we reject the null hypothesis since the data appears
to be stationary at first difference. But MShand MS are not stationary at first difference. Therefore
all variables are integrated of order one I (1).

5.2. Optimal Lag selection

However, before applying this test, it is necessary to determine the appropriate lag length and
check the stability of the VAR. The lag length is selected according to Final Prediction Error
(FPE), Akaike Information Criterion (AIC), Hannan-Quinn Information Criterion (HQIC) and
Schwarz Information Criterion (SIC). The more lags we include, the more initial values we lose.
If we include too few lags, the size of the test will be incorrect (Wooldridge, 2000). VAR lag
exclusion test is also applied so as to check the suitability of the lag included for estimation
techniques.

VAR Lag Order Selection Criteria

Endogenous variables: ROA LQ OV CA AC SI MC GDP CPIMDIR
Exogenous variables: C
Date: 10/19/15 Time: 15:13
Sample: 1973 2013
Included observations: 38

Lag LogL LR FPE AIC SC HQ

0 -1436.920 NA 2.13e+18 76.25892 76.77605 76.44291

1 -1031.272 533.7466 3.15e+12 62.48801 69.21073 64.87990

2 -708.4315 220.8909* 4.25e+09* 53.07534* 66.00365* 57.67514*

55 | P a g e
Table 5.2 Lag selection test
* indicates lag order selected by the criterion
LR: sequential modified LR test statistic (each test at 5% level)
FPE: Final prediction error
AIC: Akaike information criterion
SC: Schwarz information criterion
HQ: Hannan-Quinn information criterion

As shown in Final Prediction Error(FPE), Akaike Information Criterion (AIC), Hannan-Quinn

Information Criterion (HQIC) and Schwarz Information Criterion (SIC)that the optimal lag
selection is 2 and this is shown as follows.

5.4. Co-Integration Estimation (Long-run analysis)

Before estimating the VAR model, estimating the existence long run relationship among the
variables using co integration test is the first step. If there is no co-integration between variables,
there is no long-run relationship between them. Hence, to test this long run relationship the
Johansen co-integration method is applied. If the test statistics is greater than the critical values,
the null hypothesis that there exists r co-integrating vectors against the alternative hypothesis that
there are r+1 (for λtrace) or more than r (for λ max) is rejected. It can be concluded that there is a
long-run relationship among the variables. The result of testing the number of co-integrating
vectors is shown in table (5.3).

Date: 10/27/14 Time: 04:44

Sample (adjusted): 1976 2013
Included observations: 38 after adjustments
Trend assumption: Linear deterministic trend
Series: ROA MC LQ GDP CA ALIR AC CPI SI
Lags interval (in first differences): 1 to 2

56 | P a g e
Hypothesized Trace 0.05
No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None * 0.997838 658.6170 197.3709 0.0001

At most 1 * 0.961157 425.4270 159.5297 0.0000
At most 2 * 0.951150 301.9947 125.6154 0.0000
At most 3 * 0.888495 187.2729 95.75366 0.0000
At most 4 * 0.748611 103.9129 69.81889 0.0000
At most 5 * 0.540689 51.44436 47.85613 0.0221
At most 6 0.266215 21.87932 29.79707 0.3052
At most 7 0.219371 10.11681 15.49471 0.2719
At most 8 0.018405 0.705913 3.841466 0.4008

Table 5.3(a) Unrestricted Cointegration Rank Test (Trace)

Trace test indicates 6 cointegrating eqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values

Hypothesized Max-Eigen 0.05

No. of CE(s) Eigenvalue Statistic Critical Value Prob.**

None * 0.997838 233.1900 58.43354 0.0000

At most 1 * 0.961157 123.4323 52.36261 0.0000
At most 2 * 0.951150 114.7218 46.23142 0.0000
At most 3 * 0.888495 83.36000 40.07757 0.0000
At most 4 * 0.748611 52.46857 33.87687 0.0001
At most 5 * 0.540689 29.56504 27.58434 0.0275
At most 6 0.266215 11.76251 21.13162 0.5713
At most 7 0.219371 9.410893 14.26460 0.2535
At most 8 0.018405 0.705913 3.841466 0.4008

Table 5.3.(b) Unrestricted Cointegration Rank Test (Maximum Eigenvalue)

Max-eigenvalue test indicates 6 cointegrating eqn(s) at the 0.05 level
* denotes rejection of the hypothesis at the 0.05 level
**MacKinnon-Haug-Michelis (1999) p-values

It can be shown from the table 5.3 (a) that the unrestricted co-integration rank test (Trace) there
are six co-integrating vectors at the 5% critical value in the system and table 5.3 (b), also tells us
that the unrestricted co-integration rank test (Maximum Eigenvalue) shows six co-integrating
vectors in the system. Thus based on trace statistics output, we can conclude that there is long run
57 | P a g e
relationship between the variables under consideration. Thus, based on the two statistics results
we can conclude that there exists meaningful long run relationship between the variables under
consideration.
It can be seen from the above tables that the unrestricted co-integration rank test (Trace) and
(Maximum Eigenvalue) shows that there are at least two co-integrating vectors at 5 percent critical
value in the system respectively. Thus, based on the two statistics results we can conclude that
there exists meaningful long run relationship between the variables under consideration.
The normalized long run estimated co-integration results are shown in the following equation.

Long Run Equation:

ROA = - 1.58*OV -0.85*MDIR + 17.58*MC - 1.39*LQ + 2.49*GDP - 0.72*CPI +0.21*CA

This long-run equation for return on asset is dependent on liquidity, overhead cost, capital
adequacy, market structure, gross GDP, Minimum deposit interest rate and inflation. As the output
indicates that the factors impact of return on asset both positively and negatively. The result
indicates that capital adequacy , Gross domestic product, and Market Concentration has positive
impact at 5 percent level of significance and overhead cost, minimum deposit interest rate, liquidity
and inflation has negative long run effects on the rate profitability of the bank at 5% significance
level.

As one percent increase in market concentration will increase profitability of CBE by 17.58% in
long run. In the long run one percent increase in gross domestic product will increase CBEs profit
by 2.49% while increase in one percent of inflation decreases it by 0.72%. An increase in minimum
deposit interest rate have shown to decrease CBEs profit by 0.85% in long run. When we observe
the internal factors, one percent increase capital ratio will increase CBEs profitability by 0.21%
while one percent increase in overhead cost and liquidity showed to decrease profitability by
1.58% and 1.39% respectively.

Since we get the long run co-integrated relationship among variables, therefore, we can estimate
the VAR model. The main point of the VAR VECM Model analysis is the error correction term
(the one period lagged error terms) from the above estimated co-integrating equations. These

58 | P a g e
lagged terms provide an explanation of the short run deviations from the long-run equilibrium. We
found out that in the long run it will correct itself by 38.56%.

Hence, the main objective of the paper is to find the long run co-integrating relationship and short
run dynamics between deposit growth rate and control variables. The estimated results are shown
as follows.

5.6. Short run analysis Vector Autoregressive Model (VAR)

If the variables are the co-integrated and an optimal lag of one is chosen based on the information
criteria results and we can estimate the CVAR. In the VAR, we can see the short run -run co
integrating coefficients and the short run coefficients (for the short-run analysis). The estimated
results are shown as follows.The CVAR Model provides important information on the short-run
relationship between any co integrated variables. From the above computation, we have the
following short run CVAR estimation outputs.

System: UNTITLED
Estimation Method: Least Squares
Date: 10/28/14 Time: 08:36
Sample: 1975 2013
Included observations: 39 Total system (balanced) observations 39

Coefficient Std. Error

t-Statistic Prob.

-0.385602 0.186751 -2.064789

C(1) 0.0480
C(2) -0.056675 0.198743 -0.285164 0.7775
C(3) 0.106802 0.271804 0.392938 0.6972
C(4) -1.020089 0.561637 -1.816279 0.0797
C(5) 3.630364 2.597578 1.397596 0.1728
C(6) 0.298533 0.460075 0.648879 0.5215
C(7) 2.801503 1.715463 1.633089 0.1133
C(8) 1.134669 0.925688 1.225757 0.2302
C(9) 0.089738 0.175423 0.511551 0.6128
C(10) -0.183206 0.124883 -1.467025 0.1531

0.250358
Determinant residual covariance

59 | P a g e
 *C(3)*D(OV(-1)) + C(4)*D(MDIR(-1)) + C(5)*D(MC(-1)) + C(6)*D(LQ(-1)) +
C(7)*D(GDP(-1)) + C(8)*D(CPI(-1)) + C(9)*D(CA(-1)) + C(10)
Observations: 39
R-squared 0.507792 Mean dependent var 0.013958
Adjusted R-squared 0.355037 S.D. dependent var 0.722515
S.E. of regression 0.580249 Sum squared resid 9.763976
Durbin-Watson stat 2.273360

As the estimated result of the VAR VECM indicates that most lagged variables has insignificant
impact on return on asset in short run.

5.4. Diagnostic Tests

This test are usually used to detect model misspecification and as a guide for model improvement.
As a result, Different post estimation diagnostic tests were performed for the above three of error
correction models to assure the estimation results and inferences are trustable. These tests include
serial correlation, heteroscdasticity and normality tests. In the models, there is no evidence that
shows the presence of autocorrelation from the first to four lags.

In the estimated result, the LM test shows that there is no serial correlation i.e. we do not reject the
null hypothesis of residuals are not serially correlated at 5% level of significance.

The hetreroscedasticity test helps to identify whether the variance of the errors in the model are
constant or not. The null hypothesis of the test is that the errors are homoscedastic and independent
of the repressors’ and that there is no problem of misspecification. The ARCH hetroscheskedastic
test shows that the chi-square p-value is more than 5 percent in all models meaning we cannot
reject null hypothesis of no ARCHI affect that is desirable. Meaning that, we do not reject the
nullhypothesis that the residuals are homosecdasic at 5% significance level. Therefore, the
residuals of the model are found to be homoskedastic.

VEC Residual Serial Correlation LM Tests Null

Hypothesis: no serial correlation at lag order h
Date: 10/28/14 Time: 10:25
Sample: 1973 2013
Included observations: 39
60 | P a g e
 Lags LM-Stat Prob

1 56.07905
0.7491
2 57.30366 0.7103
3 61.68609 0.5588
4 90.14926 0.0173
5 48.91905 0.9185
6 71.02913 0.2552
7 74.00800 0.1839
8 85.92640 0.0351
9 41.23915 0.9880
10 80.98685 0.0744
11 108.9658 0.0004
12 136.9410 0.0000

Probs from chi-square with 64 df.

By using the Jarque-Bera normality test, the study checked whether the residuals are normally
distributed or not. In the first model, the result of the J-B test shows that the residual vector of the
model is found to be jointly normal at the 5% level of significance because, we do not reject the
null hypothesis that the residualsare normal. However, in the third model J-B test of p- value is
less than 5 % indicates we do reject the null hypothesis residual are normally distributed meaning
that residuals are not normal.

VEC Residual Normality Tests

Orthogonalization: Cholesky (Lutkepohl)
Null Hypothesis: residuals are multivariate normal
Date: 10/28/14 Time: 10:29
Sample: 1973 2013
Included observations: 39

Component Skewness Chi-sq df Prob.

1 -1.310656 11.16583 1 0.0008

2 -0.133614 0.116043 1 0.7334

3 -0.334948 0.729236 1 0.3931
4 0.156026 0.158237 1 0.6908
5 2.848266 52.73203 1 0.0000
6 0.903343 5.304191 1 0.0213
7 0.136118 0.120433 1 0.7286
8 2.223896 32.14713 1 0.0000

61 | P a g e
 102.4731 8 0.0000
Joint

Component Kurtosis Chi-sq df Prob.

1 8.972118 1
57.95756 0.0000
2 4.221340 2.423965 1 0.1195
3 4.168060 2.217091 1 0.1365
4 3.620112 0.624876 1 0.4292
5 16.03667 276.1767 1 0.0000
6 4.204005 2.355644 1 0.1248
7 11.44673 115.9392 1 0.0000
8 11.13242 107.4715 1 0.0000

Joint 565.1665 8 0.0000

Component Jarque-Bera df Prob.

1 2
69.12339 0.0000
2 2.540008 2 0.2808
3 2.946327 2 0.2292
4 0.783113 2 0.6760
5 328.9087 2 0.0000
6 7.659835 2 0.0217
7 116.0597 2 0.0000
8 139.6186 2 0.0000

Joint 667.6397 16 0.0000

To conclude, the LM tests showed that residuals of the models is not serially correlated and ARCH
test of heteroskedasticity also showed no problem of heteroskedasticity. In addition, residuals of
the first model are normally distributed as tested by Jarque-Bera (J-B) normality statistical test.
Therefore, these diagnostic tests suggest that the validity and robustness of the estimated results
62 | P a g e
of the above model.Hence, the selected models adopted in the study are good and robust in
estimating long run and the short relationships between rate of credit financing and the
manufacturing sector performance considered.

63 | P a g e
 CHAPTER SIX

CONCLUSION AND RECOMMENDATION

6.1. Conclusion
In the descriptive analysis of banking industry, it is found that there were continuous growth of net profit
after 2004 for all banks but increasing trend of return on asset only between 2004 and 2007 only. Their loan
and deposit, capital and asset in total have shown different starting periods for exponential growth but all
are in increasing growth in late years of the study. But their liquidity ratiohas shown unanimity in the late
years after 2012 to be in the range of 0.4 and 0.6 against NBE rule not to be less than 15 %.( Directive No.
SBB/57/2014)In line with national bank requirement to have a minimal capital ratio of 8%, private banks
capital ratio have been above 10% since 1998 while CBB has qualified after 2006 but CBE only qualified
only in the period of 2007 to 2009.(Directive No. SBB/9/95) the market structure has concentrated and
monopolistic character with decline in the years before 2009 but stagnant afterwards. With linear regression
data, market concentration has weak but negative impact on profitability of banking industry while it has
weak but positive impact on profitability of private banks.

Regression of profitability (measured by return on asset) against determinant variables of the study has
resulted both internal and external factors affect the return of Commercial bank of Ethiopia. Of the internal
variables capital Adequacy has positive impact on return on asset of CBE while increase in overhead cost
and liquidity will adversely affect return on asset. When we consider the Macroeconomic variables, GDP
and market concentration has great impact on the profitability of CBE while Inflation and Minimum
depositinterest rate have mild negative impact on profitability of CBE.

As a conclusion of this study, both descriptive and quantitative analysis has shown that both macroeconomic
and bank specific factors happen to influence profitability of bank even though their magnitude and
direction differs. Structural Changes in the banking industry and specifically in commercial bank is
observed in significant amount after the year 2003 and/or 2004 G.C. onwards. All variables used under this
study happen to be insignificant in short run. But in the long run internal variables like management
efficiency and liquidity happen to affect profitability of commercial Bank of Ethiopia significantly and
negatively and capital adequacy happen to affect profitability of CBE significantly and positively. Industry
specific factors Market concentration has shown significant and positive relation with profitability of CBE.
While Macroeconomic variables such as economic growth have shown significant and positive impact on

64 | P a g e
profitability of CBE while Minimum deposit interest rate and inflation happen to influence profitability of
CBE significantly and negatively in long run.

6.2. Recommendation
Based on the study conducted on this paper we recommend,

• New entrants to the market should consider to enter the market with high capital and
strategy to efficiency in management. In addition, it is favorable for them to inter the
market where there is forecast of high economic and domestic product growth.

• It support national banks earlier advice of commercial banks to increase their capital to
above two billion birr for existing banks and proclamation to increase of the requirements
of initial capital for new entrants. This study also recommend the existing banks to increase
their capital.

• This paper also recommends Commercial Bank of Ethiopia authorities to work extra on
non-traditional banking, market dominance, and management efficiency while taking the
expansion policy during expected high economic growth and low inflation.

• Finally, this paper recommend further study

• To test the impact of these macro and micro specific variables in private banks taking
quarterly data and /or panel data from 2004 onwards only since a significant change in the
industry is observed after wards.

• on characteristics of response to changes in legal frame work and market both qualitatively
with interview of delegated authorities and quantitatively using cross sectional data
between banks individually.

65 | P a g e
REFERENCE

• Abdel-Hameed M.Bashir (2003), Determinants of Profitability in Islamic Banks: Some

evidence from the middle east, Islamic Economic Studies Vol. 11, No. 1
• Akella S.R. and S.J. Chen (1990), Interest rate sensitivity of bank stock returns:
Specification effects and structural changes, Journal of Financial Research, Vol.13
• Amer Azlan Abdul Jamal, Masyhuri Hamidi PhD and Mohd Rahimie Abdul Karim (2012),
Determinants of Commercial Banks’ Return on Asset: Panel Evidence from Malaysia,
IRACST – International Journal of Commerce, Business and Management (IJCBM), Vol.
1, No3
• Angbazo, L. (1997), “Commercial bank net interest margins, default risk, interest rate risk,
and off balance sheet banking”, Journal of Banking and Finance, Vol. 21, pp. 55 87
• Angela Roman and Adina Elena Dănuleţiu (2013),An imperical Analysis of the
determinants of the bank profitability in Romania, Annales Universitatis Apulensis Series
Oeconomica, 15(2), 2013
• Bader Yousef Obeidat and et al (2013), Evaluating the Profitability of the Islamic Banks in
Jordan, European Journal of Economics, Finance and Administrative Sciences, Issue 56
January, 2013

• Berger, A.N. (1995), “The relationship between capital and earnings in banking”, Journal of
Money, Credit and Banking, Vol. 27.
• Berger, A.N. and Humphrey, D.B. (1997), “Efficiency of financial institutions:
international survey and directions for future research”, European Journal of Operational
Research, Vol. 98
• Beverly Hirtle (2005), The Impact of Network Size on Bank Branch Performance, Federal
Reserve Bank of New York, 2007
• Bourke P. (1989), "Concentration and other Determinants of Bank Profitability in Europe",
Journal of Banking and Finance

66 | P a g e
• Boyd, J. and Runkle, D. (1993), “Size and performance of banking firms: testing the
predictions of theory”, Journal of Monetary Economics, Vol. 31

67 | P a g e
C.W.J.Grange (1986), Developments in the study of co-integrated economic variables, Oxford
Bulletin of Economics and statistics, Vol. 48, No.3
Choi J., E. Elyasiani and K. J. Kopecky (1992), The Sensitivity of the Bank Stock Returns
to Market, Interest, and Exchange Rate Risks, Journal of Banking and Finance, Vol.16
• Christos K. Staikouras and Geoffrey E. Wood (2010 ), The determinant of European
Bank
Profitability, International Business & Economics Research Journal Volume 3, Number 6
• Constantinos Alexiou and Voyazas Sofoklis (2009), Determinants of banks profitability:
Evidence from the Greek Banking sector, ECONOMIC ANNALS, Volume LIV No. 182
• Demirguc Kunt, A. and Huizinga, H. (1999), “Determinants of commercial bank interest
margins and profitability: some international evidence”, World Bank Economic Review,
Vol. 13.
• Dr. Aremu Mukaila Ayanda, Ekpo Imoh Christopher and Dr. Mustapha Adeniyi
Mudashiru (2013), Determinants of banks’ profitability in a developing economy: evidence
from Nigerian banking industry, Institute of Interdisciplinary Business Research, VOL 4,
NO 9

• Emery, John T. (1971), “Risk, Returns, and the Morphology of Commercial Banking”,
Journal of Financial and Quantitative Analysis, Vol. 6, No 2
• Erna Rachmawati and Ekki Syamsulhakim (2004), Factors affecting Mudaraba Deposit
in Indonesia, Working paper Department of Economics, Padjadjaran University
• Étienne Bordeleau and Christopher Graham (2010), The Impact of Liquidity on Bank
Profitability, Bank of Canada Working Paper 2010-38
• Evans ovamba kigand (2014), Effects of macroeconomic factors on commercial banks
profitability in Kenya: Case of equity bank limited, journal of economics and sustainable
development,Vol.5No.2
• Evans Ovamba Kiganda(2014),Effect of Macroeconomic Factors on Commercial Banks
Profitability in Kenya: Case of Equity Bank Limited, Vol.5, No.2, 2014
• Evgeni Genchev (2012), Effects of market share on the bank’s profitability, Review of
Applied Socio- Economic Research, Volume 3, Issue 1

68 | P a g e
 F. Lajeri and J. Dermine (1996), Unexpected Inflation and Bank Stock Returns, The case
of France 1977-1991, INSEAD's International Financial Services (IFS) program working
Paper
• Guru B.K., Staunton J. and Balashanmugam B. (1999), “Determinants of commercial bank
profitability in Malaysia”, paper presented at the 12th Annual Australian Finance and
Banking Conference, Sydney
• Gusti Ayu Purnamawati (2014),The effect of capital and liquidity risk to profitability on
conventional rural bank in Indonesia, South East Asia Journal of Contemporary Business,
Economics and Law, Vol. 5, Issue 1
• Hassan Kabir and Bashir M. Abdel-Hameed (2003), “Determinants of Islamic Banking
Profitability”, Proceedings of the ERF 10th Annual Conference, Marrakesh, Morocco,
2003.
• Hazel J. Johnson (1994), Prospect Theory in the Commercial Banking Industry, Journal of
Financial And Strategic Decisions Volume 7 Number 1
• Hester Donald D. and Zoellner John F. (1966), “The Relation between Bank Portfolios and
Earnings: An Econometric Analysis.”, Review of Economics and Statistics, Vol. 48
• Husam Rjoul and et al(2009),The effects of macroeconomic factors on stock returns:
Istanbul stock market, journal of studies in economics and finance,Vol.26No.1
• Ikpefan Ochei A. (2013), Capital adequacy, management and performance in the Nigerian
commercial bank (1986 - 2006), Department of Banking and Finance, Covenant
University, Ota, Ogun State, Nigeria.
• James Ayodele Owoputi, Olawale Femi Kayode and Felix Ademola Adeyefa (2014), Bank
specific, industry specific and macroeconomic determinants of bank profitability in
Nigeria, European Scientific Journal September 2014 edition vol.10, No.25
• Johansen, S., & Juselius, K. (1990). Maximum likelihood estimation and inference on
cointegration with applications to the demand for money. Oxford Bulletin of Economics
and statistics, Vol. 52 No.2

69 | P a g e
• John H. Boyd, Ross Levine andBruce D. Smith (2000), The Impact of Inflation on
Financial Sector Performance, Carlson School of Management, University of Minnesota,
Minneapolis, USA
Joseph, N.L. and Vezos, P., (2006), “The sensitivity of US banks’ stock returns to interest
rate and exchange rates changes”, Managerial Finance Vol. 32 No. 2
Juan J. Dolado, Tim J enkinson and Simon Sosvilla-Rivero (1990), Co-integration and
unit roots, Estadística Española, Vol. 32

• Kasman, Vardar and Tunc (2011), “The impact of interest rate and exchange rate volatility
on banks' stock returns and volatility: Evidence from Turkey”, Economic Modelling,
Vol.28
• Kleinbuam D.G., Kupper L.L. and Muller K.E. (1988), Applied Regression Analysis and
other Multivariable Methods, PWS Kent Publishing Co., Boston
• Kozo Harimaya and Kazumine Kondo (2011), The Effects of Branch Expansion on Bank
Efficiency: Evidence from Japanese Regional Banks, Faculty of Business and Commerce
Working Paper, Aichi Gakuin University, Japan

• Krakah, A. K. & Ameyaw, A. (2010), Determinants of Bank’s Profitability in Ghana:The

Case of Merchant Bank Ghana Limited (MBG) and Ghana Commercial Bank (GCB).",
Master’s Thesis in Business Administration, Accra, Ghana. Working paper
• Kwan Simon H. (1991), “Re-Examination of Interest Rate Sensitivity of Commercial Bank
Stock Returns Using a Random Coefficient Model.”, Journal of Financial Services
Research, Vol. 5
• Lina Tu Lili D.B.A.(2012), The impact of macroeconomic factors on banking industry
stock return, Paper as fulfillment for MBA in international business, International college,
University of the Thai Chambers of Commerce
• Mahmudul (2009), Relationship between Interest Rate and Stock Price: Empirical
Evidence from Developed and Developing Countries, International Journal of Business and
Management Vol.4 No.3
• Mansur and Elyasiani (1998), Sensitivity of the bank stock returns distribution to changes
in the level and volatility of interest rate: A GARCH-M Model”, journal of Banking and
financial

70 | P a g e
• Molyneux, P. and Thorton, J. (1992), “The determinants of European bank profitability”,
Journal of Banking and Finance, Vol. 16 No. 6.

Muhammad Bilal, and et al (2013), Influence of Bank Specific and Macroeconomic Factors
on Profitability of Commercial Banks: A Case Study of Pakistan, Research Journal of
Finance and Accounting Vol.4, No.2, School of Banking and Finance, Government
College University Faisalabad, Pakistan
• Munyambonera Ezra Francis (2013), Determinants of Commercial Bank Profitability in
Sub-Saharan Africa, International Journal of Economics and Finance; Vol. 5, No. 9; 2013
• Mustafa M. Soumadi and Bassam Fathi Aldaibat (2010), Growth Strategy and Bank
profitability: Case of Housing for trade and finance, European Scientific Journal October
edition vol. 8, No.22
• Nicolae Petria, Bogdan Capraru, and Iulian Ihnatov ( 2015 ), Determinants of banks’
profitability: evidence from EU 27 banking systems, Procedia Economics and Finance,
Vol. 20
• Olivier de Bandt, Boubacar Camara and Pierre Pessarossi, Martin Rose (2014), does the
capital structure affect banks’ profitability? Pre- and post-financial crisis evidence from
significant banks in France, Débats économiques et financiers N°12
• P. I. Vong and H.S. Chan (2009), Determinants of bank profitability in Macao, Macau
Monetary Research Bulletin, Vol. 12 No.6

• Pallage S.J. (1991), “An econometric study of the Belgian banking sector in terms of scale
and scope economies”, Cahiers Economiques de Bruxelles, Vol. 130
• Pan, Q.H. and Pan, M.L. (2014) The Impact of Macro Factors on the Profitability of
China’s Commercial Banks in the Decade after WTO Accession. Open Journal of Social
Sciences, Vol. 2, and No. 64- 69.
• Panayiotis P. Athanasoglou, Sophocles N. Brissimis and Matthaios D. Delis (2005),
BankSpecific, Industry Specific and Macroeconomic Determinants of Bank Profitability,
Bank of Greece Working Paper

71 | P a g e
• Paolo Saona Hoffmann (2011), Determinants of the Profitability of the US Banking
Industry, International Journal of Business and Social Science Vol. 2 No. 22, 2011

• Paul Kupiec and Yan Lee (2012), What Factors Explain Differences in Return on Assets
Among Community Banks?, Federal Deposit Insurance Corporation
Pro.Sudin Haron (2004), Determinants of Islamic banking profitability, Global Journal of
Finance and Economics. USA, Volume 1, No 1, March 2004
Qinhuapan and meiling pan (2014),The impact of macroeconomic factors on profitability
of china’s commercial banks in the decade after WTO accession, Open journal of social
sciences,Vol.2No.64-69
• Robert F. Engle and C. W. J. Granger (1987), Co-Integration and Error Correction:
Representation, Estimation and Testing Econometrica, Vol. 55, No. 2.
• Sadia saeed and Noreen Akhter(2012), Impact of macroeconomic factors on banking index
in Pakistan, Interdisciplinary journal of contemporary research in business, Vol.4No.6,
Islamabad, Pakistan
• Samy Ben Naceur (2003), The determinants of the Tunisian banking industry profitability:
panel evidence, ERF research fellow, University Libre de Tunis
• Sebnem Er and Bengu Vuran (2012),Factors affecting stock returns of firms quoted in ISE
market: A dynamic panel data approach, International Journal of business and social
research(IJBSR)Vol.2No.1,2012
• Shista wasiuzzaman and hammas-ayu bt Ahamad tarmizi (2012),Profitability of Islamic
banks in Malaysia: An empirical Analysis, Journal of Islamic economics, banking and
finance,Vol.6No.4

• Short B.K. (1979), “The relation between commercial bank profit rate and banking
concentration in Canada, Western Europe and Japan”, Journal of Banking and Finance,
Vol. 3.
• Soren Johansen (1988), statistical analysis of co-integration vectors, journal of economic:
dynamics and control, Vol. 12, North Holland
• Tesfaye Boru Lelissa (2014), The Determinants of Ethiopian Commercial Banks
Performance, European Journal of Business and Management, Vol.6, No.14, 2014

72 | P a g e
• Tomola Marshal Obamuyi (2013), Determinants of Banks’ Profitability in developing
Economy: Evidence from Nigeria, Organizations and Markets in Emerging Economies,
VOL. 4, No. 2(8)
Tugut tursay and et al (2008), Macroeconomic factors, the APT and the Istanbul stock
market, International research journal of finance and economics, Issue 22, euro journals
publishing Inc.
• Valentina Flamini, Calvin McDonald and Liliana Schumacher (2009), The Determinants
of Commercial Bank Profitability in Sub-Saharan Africa, IMF Working Paper, African
Department

• Vaz J.J. Ariff M. and Brooks R.D. (2008), “Effect of Interest rate change on Bank stock
returns”, Investment Management and Financial Innovations, Vol.5, No.4
• W/Michael Shibru,Hamdu Kedir and Yonas Mekonnen (2015), Factors affecting the
financing policy of Commercial Banks in Ethiopia, International Journal of Research in
Business and Social Science, Vol.4 No.2, 2015
• Waseem Ahmad Khan and et al (2014), Impacts of Inflationary Trends on Banks’
Performance (Large Banks Segment) in Pakistan, International Journal of Accounting and
Financial Reporting, Vol. 4, No. 1
• William et al (1994), Domestic and international determinants of bank profits: Foreign
banks in Australia, Journal of Banking and Finance 27
• Yourougou P. (1990), “Interest-rate risk and the pricing of depository financial
intermediary common stock”, Journal of Banking and Finance, Vol. 14
• Zawadi Ally (2014), Determinants of Banks’ Profitability in a Developing Economy:
Empirical Evidence from Tanzania, European Journal of Business and Management, Vol.6,
No.31, 2014
• Stanlet B. Block and Geoffrey A. Hirt (2002), Foundations of financial Management,
McGraw Hill Irwin, New York, U.S.A., 10th ed.

73 | P a g e
• Peter S.Rose and Sylvia C.Hudgins (2008), Banking management and financial services,
McGraw-Hill international Edition, Singapore, 7th ed.
• H.Kent Baker and Gary E.Powell (2005), understanding financial management: A Practical
Guide, Blackwell publishing, Oxford, UK, 1st ed.
• Mabwe Kumbirai and Robert Webb (2010), A financial Ratio Analysis of Commercial
Bank Performance in South Africa, African Review of Economics and Finance, Vol. 2, No.
1
Samad Abdus and Kabir Hassan (2000), “The Performance of Malaysian Islamic Bank
During 1984-1997: An Exploratory Study, Thoughts on Economics, Vol.10, no. 1 & 2
Ugwunta David Okelue and et al (2012), The Structure of the Nigerian Banking Sector and
its Impact on Bank Performance, Journal of Economics and Sustainable Development,
Vol.3, No.7
• Mauro Mecagni, Daniela Marchettini and Rodolfo Maino (2015), Evolving Banking
Trends in Sub-Saharan Africa: Key Features and Challenges, IMF African Department
• Anne Sigismund Huff and et al (2009), strategic management logic and action, John Wiley
and sons Inc.
• Michael R.Baye (2009), Managerial economics and business strategy, McGraw-Hill
international edition, 6th ed.
• John A.Pearce II and Richard B.Robinson Jr. (2003), Strategic Management: Strategy
Formulation and Implementation, A.I.T.B.S. Publishers and distributors, 3rd ed.
• Montfort Mlachila and et al (2013), banking in Sub-Saharan Africa: Challenges and
Opportunities, European investment Bank
• Huff and et al (2009), profit is the level of return after all costs of the unit’s activities have
been subtracted from revenue. Michael (2009) defined profit as the difference between total
revenue and total opportunity cost.
• Pentela Fareed Mastan (2015), An empirical study on the determinant factors of Ethiopian
Commercial banks profitability, Gloabal Journal for research analysis, Vol.4 Issue 4
• Samuel Alemu (2015), Determinants of Commeercial Banks profitability: The case of
Ethiopian Commercial Banks, Addis Ababa University

74 | P a g e
• Habtamu Negussie Ayele (2012), Determinants of Bank Profitability: An Empirical Study
on Ethiopian Private Commercial Banks
• Lalith Seelanatha (2010), Market structure, efficiency and performance of banking industry in Sri
Lanka, Banks and Bank Systems, Volume 5, Issue 1
• Directive No. SBB/57/2014
• Directive No. SBB/9/95
• Nbe.gov.et, May 2015

75 | P a g e
 Annex-I
This is a list of banks in Ethiopia with background history as of june,2015
Year No of Profit in EB
Bank Name Web Site SWIFT Est. Branches (2013/14)

1 Abay Bank S.C. http://www.abaybank.com.et/ 2010 79 ABAYETAA 75,000,000.00

2 Addis International Bank http://www.addisbanksc.com/ 2011 18 ABSCETAA 60,000,000.00

3 Awash International Bankhttp://www.awashbank.com/1994 191 AWINETAA 861,000,000.00 4 Bank of Abyssinia
http://www.bankofabyssinia.com/1996 111 ABYSETAA 351,300,000.00
5 Berhan International Bank http://berhanbanksc.com/ 2010 46
BERHETAA 131,000,000.00
6 Bunna International Bank http://www.bunnabanksc.com/ 2009 72
BUNAETAA 109,000,000.00
Commercial Bank of
7 http://www.combanketh.et/ 1963 909[2] CBETETAA 9,700,000,000.00
Ethiopia
Construction and Business
8 http://www.cbb.com.et/Index.html 1983 106 COUUETAA 110,000,000.00
Bank
Cooperative Bank of
9 http://www.coopbankoromia.com.et/ 2005 144[3] CBORETAA 485,000,000.00
Oromia
10 Dashen Bank http://www.dashenbanksc.com 2003 146[4] DASHETAA
928,000,000.00
11 Debub Global Bank http://www.debubglobalbank.com/ 2012 32
DEGAETAA 19,000,000.00
Development Bank of
12 http://www.dbe.com.et/home/ 1909 43 BEETETAA 491,000,000.00
Ethiopia
13 Enat Bank http://www.enatbanksc.com/ 2013 7 ENATETAA
39,000,000.00
14 Lion International Bank http://www.anbesabank.com/ 2006 67 LIBSETAA
128,000,000.00 http://www.nibbank-
15 Nib International Bank 1999 98 NIBIETTA 420,000,000.80
et.com/index.php
16 Oromia International Bankhttp://www.orointbank.com/ 2008 115 ORIRETAA 205,000,000.40
17 United Bankhttp://www.unitedbank.com.et/1998 108[5]UNTDETAA 350,000,000.00
18 Wegagaen Bank http://www.wegagenbanksc.com/ 1997 98 WEGAETAA 394 ,000,000.30
19 Zemen Bank http://www.zemenbank.com/ 2009 1 ZEMEETAA 131,000,000.00 2357
14,425,000,000.00 Total

Source: (nbe.gov.et)
76 | P a g e
77 | P a g e