FACTORS AFFECTING CONSUMER”S PURCHASE INTENT TOWARDS

LOCALLY MANUFACTURED LEATHER SHOES
(THE CASE SHEBA LEATHER INDUSTRY S.C.)

BY: WOINSHET SHUME

AMBO, ETHIOPIA

JUNE, 2023
 INTRODUCTION TO CONTENTS
• Background of the study • Research Methodology
• Statement of Problem • Result and discussion
• Research Hypothesis  Descriptive Analysis

• Research Objectives  Inferential Statistics

• Scope of the study • Conclusion and Recommendations

• Related Literature Review

 1. Introduction

1.1. Background of the study

• Banks are very important in every economy because they provide special functions or services in the
country (Altman et al., 2002).

• And the number of banks in Ethiopia is dramatically increasing and consequently the competition is also
expected to be tough together with. To cope with this tough competition, banks need to increase their
profitability and competitive advantage.

• One and major way to do that will be having optimal credit policy even though it is difficult to come up
with as it is vulnerable to changes economic conditions and change in these conditions cause a change in
credit policy of banks .

• Credit risk management is difficult task due to its complexity and unpredictability of macroeconomic
factors together with different microeconomic variables. Which are challenging for banks and this study
tries to examine the effect of credit risk management on the profitability performance of CBE.
1.2. Statement of Problem
• The major earning assets of a bank are its loans to individuals, businesses, and other organizations.
• Different researches reflected that credit risk is the commonly identified as the greatest risk for banks’
profitability as credit is their major source of earning revenue.
• Previous studies on the subject matter in Ethiopia reflected that credit risk and non-performing loan take the
largest share as major challenges in the financial performance of banks in Ethiopia.
• Most of previous studies made in Ethiopia were focused on DBE(Development Bank of Ethiopia
• These studies mostly considered two variables as profitability performance measurement variables i.e. ROA and
ROE.
• However, this study considers bank profitability performance as subject to the constraints of capital adequacy
ratio (CAR), non- performing loan ratio (NPLR), cost per loan assets (CPLA), cash reserve ratio (CRR), and
leverage ratio (LEV)
1.3. Research Objectives
 General Objective
The main objective of the study is to assess the effect of Credit Risk on the profitability performance of
Commercial Bank of Ethiopia.

 Specific Objectives
• To identify the effect of capital adequacy ratio, non- performing loan ratio, cost per loan assets, cash reserve
ratio, and leverage ratio on the profitability performance of Commercial Bank of Ethiopia.
• To identify the most severe variable of all affecting the profitability performance of Commercial Bank of
Ethiopia.
• To examine the profitability performance of Commercial Bank of Ethiopia
1.4. Research Hypothesis
H1: Capital adequacy ratio has a positive and significant effect on ROA (Return on Asset)
H2: Capital adequacy ratio has a positive and significant effect on ROE (Return on Equity)
H3: Non- performing loan ratio has a negative and significant effect on ROA (Return on Asset)
H4: Non- performing loan ratio has a negative and significant effect on ROE (Return on Equity)
H5: Cost per loan assets has a negative and significant effect on ROA (Return on Asset)
H6: Cost per loan assets has a negative and significant effect on ROE (Return on Equity)
H7: Cash reserve ratio has a negative and significant effect on ROA (Return on Asset)
H8: Cash reserve ratio has a negative and significant effect on ROE (Return on Equity)
H9: Leverage ratio has a positive/negative and significant effect on ROA (Return on Asset)
H10: Leverage ratio has a positive/negative and significant effect on ROE (Return on Equity)
  
1.5. Scope of the study
• This study delimited to identifying the effect of credit management on profitability performance of CBE.

• Seven credit risk management indicators like capital adequacy ratio, non- performing loan ratio, cost per
loan assets; cash reserve ratio, assets growth ratio, and leverage ratio as credit management indicators.

• The study was conducted on the basis of financial reports of the bank for the years ranging from 2015/16 –
2020/21.
 2. Related Literature Review

Theoretical Review - This content includes theoretical concepts related to commercial bank profitability,
bank’s risk management, Risk Management, Credit risk management, credit risk management indicators.

Empirical Review – Review of Previous studies related to this study

Conceptual Framework

Capital Adequacy Ratio (CAR) Dependent Variable

Non- performing Loan Ratio
Profitability Performance of
(NPLR)
the bank (ROA & ROE)
Cost Per Loan Assets (CPLA)
Cash Reserve Ratio (CRR)
Leverage Ratio (LEV).

Source: Researcher, 2022

 3. Research Methodology

3.1. Research Approach – Quantitative method was be applied to measure the effect of identified seven
variables on Profitability performance of the bank understudy.

3.2. Research Design – Explanatory study type - to find out the relationship between seven independent
variables and the dependent variable

3.3. Data Type and Data Source The study only use secondary data types. Appropriate secondary data
will be collected from the organization publication and annual report produced books (mainly), literatures,
websites (internet) and available source for conducting the research.

3.4. Data Collection procedure - Annual Reports for 6 years, 2015/16 – 2020/21 were used as a main data
source. The study necessitates looking into financial statements within the annual reports of the Commercial
Bank of Ethiopia
Cont…
3.5. Method of data Analysis - The researcher makes use of multiple regression analysis in the study:
the relation of one dependent variable to multiple independent variables. The regression outputs are
obtained by using Eview – 12.
3.6. Model Specification
I. ROAit = β0 + β1CARit + β2NPLRit + β3CPLAit + β4CRRit + β5LEVit + εit
II. ROEit = β0 + β1CARit + β2NPLRit + β3CPLAit + β4CRRit + β5LEVit + εit
Where,
β0 = the coefficient of the constant or y-intercept,
β1 = the coefficient of the 1st predictor (CAR)
β2 = the coefficient of the 2nd predictor (NPLR),
β3 = the coefficient of the 3rd predictor (CPLA),
β4 = the coefficient of the 4th predictor (CRR),
β5 = the coefficient of the 5th predictor (LEV),
Error term = the difference between the predicted and observed value of Y
 4. Result and Discussion
4.1. Descriptive Analysis
• ROA (Return on Asset)
 Average mean value of return on asset (ROA) is 1.965 which tell that on average CBE has achieved
1.965% of ROA for the last six years. The standard deviation for return on asset is 1.055 implying return
on asset of CBE may deviate from the mean value by 1.055 percent ranging from 0.96 percent to 3.87
percent.
It is possible to say that the profitability performance of the bank is far is on satisfactory level as the mean
value of 1.965% is close to an acceptable return rate of 2%.
 ROE of CBE for the last six years has been examined descriptively and the bank registered an average
30.45% of ROE.
Some researcher believe that Return on equity between 15% and 20% are considered desirable but the
average mean of 30.45% is too big for the desirable rate of ROE. This shows the bank is either making good
profit or the bank is operating in a small, inefficient, and less competitive market.
Considering, the market the bank operates in the researcher concluded that the bank is making good profit.
 4.2. Inferential Statistics
4.2.1. Model Validity Test
4.2.1.1. Multicollinearity Test
  ROA ROE NPLR LEV CRR CPLA CAR

ROA 1.00            

ROE 0.988 1.00          

NPLR -0.48 -0.357 1.00        

LEV 0.308 0.220 -0.772 1.00      

CRR -0.176 -0.076 0.732 -0.571 1.00    

CPLA -0.727 -0.722 0.141 0.266 -0.293 1.0  
CAR -0.680 -0.740 0.377 0.034 -0.049 0.965 1.0
Key: ROA – Return on Asset, ROE - Return on Equity, NPLR – Non-Performing Loan Ratio, CRR – Cash Reserve Ratio, CPLA –
Cost Per Loan Ratio, CAR – Capital Adequacy Ratio

Since none of the correlations appeared in the table above have correlation value of more than 0.8, it is possible to
conclude that there is no multicollinearity issue or a linear relationship between the explanatory variables presented
in this study.
4.2.2. Regression Analysis
4.2.2.1. ROA as a dependent Variable
• - 0.946 and adjusted - .734 73.4% of volatilities in ROA are explained by volatilities in the
independent variables capital adequacy ratio, cost per loan asset, cash reserve ratio, leverage ratio, and
non-performing loan ratio.
• Thus, 73.4% of the dependent variable has been explained by the variables included in this model which
means the rest 26.6% is explained by factors other than identified in this study.
Capital adequacy ratio 0.78 ( +ve coefficient) & 0.01 (Sig. level)
Leverage ratio 0.03 ( +ve coefficient) & 0.03 (Sig. level)
Cost per loan asset - 0.51 ( -ve coefficient) & 0.02 (Sig. level)
Non-performing loan ratio - 0.73 ( -ve coefficient) & 0.04 (Sig. level)
Cash reserve ratio - 1.10 ( -ve coefficient) & 0.40 (InSig. level)
• Capital adequacy ratio and leverage ratio found to have positive and significant relationship with ROA
• Cost per loan asset and non-performing loan ratio identified to have negative and significant relationship
with ROA
• Cash reserve ratio was the only credit risk indicator variable with no significant effect on the ROA
4.2.2. Regression Analysis
4.2.2.1. ROE as a dependent Variable
• - 0.952 and adjusted - .763 76.3% of volatilities in ROE are explained by volatilities in the
independent variables capital adequacy ratio, cost per loan asset, cash reserve ratio, leverage ratio, and
non-performing loan ratio.
• Thus, 76.3% of the dependent variable has been explained by the variables included in this model which
means the rest 23.7% is explained by factors other than indicated in this study.
• Capital adequacy ratio 11.5 ( +ve coefficient) & 0.04 (Sig. level)
Leverage ratio 0.62 ( +ve coefficient) & 0.04 (Sig. level)
Cost per loan asset -7.69 ( -ve coefficient) & 0.02 (Sig. level)
Non-performing loan ratio -13.49 ( -ve coefficient) & 0.04 (Sig. level)
Cash reserve ratio -14.2 ( -ve coefficient) & 0.05 (Sig. level)
• ROE (Return on Equity) of Commercial Bank of Ethiopia is positively affected by capital adequacy ratio
and leverage ratio and negatively affected by cost per loan ratio, cash reserve ratio, and non-performance
loan ratio.
4.3. Model Specification
= + + + + + +
= + – - 0.51 + + e

ROEit = β0 + β1 CARit + β2 NPLRit + β3 CPLAit + β4 CRRit + β6 LEVit + εit

ROEit = β0 + 11.5 CARt - 13.49 NPLRt – 7.69 CPLAt – 14.26 CRRt + 0.62 LEVt + εit
 4.4. Hypothesis Testing
• Capital adequacy ratio and leverage ratio found to have positive and significant relationship
with ROA. The researcher accepted and .

• Cost per loan assets and non-performing loan ratio has registered a negative and significant
relationship with ROA as cash reserve ratio has no significant relationship with ROA
(Return on Asset). Thus, hypotheses such as and have been accepted while is rejected.

• Capital adequacy ratio and leverage ratio found to have positive and significant relationship
with ROE. Thus, and have been accepted.

• Finally, non-performing loan ratio, cost per loan assets, and cash reserve ratio have been
found to have negative and significant relationship and accordingly, , , and have been
accepted.
 5. Conclusions and Recommendations
5.1. Conclusions
• Capital adequacy ratio and leverage ratio found to have positive and significant effect on both ROA (Return on
Asset) and ROE (Return on Equity).
• Cost per loan ratio and non-performing loan ratio found to have negative and significant effect on both ROA
and ROE.
• Cash reserve ratio found to have insignificant effect on ROA but negative and significant effect on ROE.
• Taking from the findings of the study, it is possible to deduce that capital adequacy ratio was the variable with
the most positive effect and on the contrary, non-performing loan ratio found to be the variable with highest
negative effect on profitability of the bank.
• The study used Return on Asset and Return Equity to measure and the average value for ROA and ROE
indicate that the bank is profitable over the years from 2015/16 to 2020/21.
Cont.…
5.2. Recommendations
• Consideration needs to be taken by top management and financial manager of Commercial Bank of
Ethiopia and the NBE to regulate CAR to meet the required rate.
• It is expected from top management and policy makers of the bank to exert their force towards
managing and taking a close look at capital adequacy ratio and leverage ratio of the bank to have better
control over the risk exposure of the bank.
• The management of the bank should set appropriate policies in place in order to reduce the costs
associated with the loans granted.
• It is recommendable for the bank to provide a strong credit risk and loan service process management
must be adopted to keep the level of non-performing loan and loan provision as low as possible which
will enable to maintain high performance of the bank
• Lastly, the study recommends future studies to be conducted into the effect of liquidity risk, market risk
or operational risk on profitability of banks.

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