DETERMINANT OF FINANCIAL PERFORMANCE ON PRIVATE COMMERCIAL BANKS IN ETHIOPIA

Abstract

The main objective of the study was to examine determinant of financial performance on private commercial Banks in Ethiopia. Banks with 11 years of operation (service) since 2011 up to 2021; and who declared cash dividend were included. The researcher used both descriptive and explanatory research design to analyze and present data and quantitative research approach was used. Before making the regression analysis, the study went through all below listed diagnostic tests; including multicollinearity, heteroscedasticity; normality and autocorrelation. Regression Analysis was identified as the most appropriate tool for econometric analysis of financial data. On top of this the assumptions needed to be fulfilled for OLS were tested; the data was found to be homoscedastic, free of autocorrelation and free of Multicollinearity and residuals were normally distributed. The mean value of variables were 22.43 for return on asset as measurement of profitability serve as financial performance measurement, 7.078 for capital growth, 24.67 for deposit growth, 23.68 for loan growth, 0.4349 for liquidity, 5.995 for leverage, 23.94 for exchange rate, 0.067 for interest spread rate and 15.25 for inflation. According to the correlation output profitability or financial performance was positively correlated with capital growth, deposit growth, loan growth, liquidity, leverage, and size from the listed firm specific factors which means all firm specific factors are correlated with profitability. The regression analysis result shows R-squared statistics and adjusted R squared statistics value of 67.95% and 61.86% respectively. From total of nine incorporated variables, six variables are significant at different level which are capital growth, leverage, liquidity, firm size from bank specific and inflation and exchange rate from macro level determinants, whereas deposit growth, loan growth and interest rate spread were insignificant factors for financial performance. Banks also should strive to increase their capital through different mechanism such as actively involved in secondary market, to foreign market and stock dividend to increase the capital than cash dividend and cash bonus. Foreign currency exchange and inflation should be managed by policy amendments of National Bank of Ethiopia