ASSESSMENT OF FACTORS AFFECTING THE PROFITABILITY OF

COMMERCIAL BANK OF ETHIOPIA (THE CASE OF ASELLA BRANCH)

A RESEARCH SUBMITTED IN THE PARTIAL

FULFILLMENT OF THE
REQUIREMENT FOR BA DEGREE ACCOUNTING AND FINANCE.

PREPARED BY:

ADVISOR:
MR. Letaa
RIFT VALLEY UNIVERSITY
COLLEGE OF BUSINESS AND ECONOMICS
DEPARTMENT OF ACCOUNTING AND FINANCE

Nov3/ 2014
ASELLA, ETHIOPIA

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 CERTIFICATE
This is to certify that thesis entitled, “ASSESSMENT OF FACTORS AFFECTING THE
PROFITABILITY OF COMMERCIAL BANK OF ETHIOPIA (THE CASE OF
ASELLA BRANCH) DESTA ABEBE, ZINASH KUMBI, BETELEHEM TEFERI
SHITO DEBELA, DESTA LEGESE for the partial fulfillment of BA degree in
Accounting and Finance at Paradise Valley University college is an original work and
not submitted earlier for any degree either at this University or any other University.

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 TABLE OF CONTENTS
Title Page
TABLE OF CONTENTS....................................................................................................3
ABSTRACT........................................................................................................................7
ACKNOWLEDGEMENT...................................................................................................8
CHAPTER ONE..................................................................................................................9
INTRODUCTION...............................................................................................................9
1.1 Background of the Study...............................................................................................9
1.2 Background of the organization.....................................................................................9
1.3 Statement of the Problem.............................................................................................11
1.4 Objective of the Study.................................................................................................11
1.4.1 General Objectives of the Study.......................................................................11
1.4.2 Specific Objectives of the Study.......................................................................11
1.5 Significance of the Study.............................................................................................11
1.6 Scope of the Study......................................................................................................12
1.7 Limitation of the Study................................................................................................12
1.8 Organization of study..................................................................................................12
CHAPTER TWO...............................................................................................................13
LITERATURE REVIEW..................................................................................................13
2.1 An Over view of commercial bank..............................................................................13
2.2 Functions of commercial banks and the services rendered by them...........................15
2.3 Agency Service..........................................................................................................16
2.4 General usability services............................................................................................16
2.5 Mechanism of credit deation......................................................................................17
2.6 Market competition and the challenges a head............................................................17
2.8 Theory of Bank..........................................................................................................17
CHAPTER THREE...........................................................................................................19
METHODOLOGY............................................................................................................19
3.1 Study Area...................................................................................................................19
3.1. Research design..........................................................................................................19
3.1. Source of data.............................................................................................................19
In this paper primary and secondary data will be used as a source of information...........19

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3.2. Method of data collection...........................................................................................19
As the sources are identified above primary sources and secondary sources of data will be
used to get realistic information from concerned bodies................................................19
3.3 Sampling techniques and sample size..........................................................................20
3.4 Method of data analysis...............................................................................................20
3.2. Research approaches...................................................................................................20
CHAPTER FOUR.............................................................................................................27
DATA PRESANTATION AND ANALYISIS.................................................................27
4.1 Introduction..................................................................................................................27
4.2 Descriptive Statistics...................................................................................................27
4.3 Return on Asset (ROA)..........................................................................................29
3.6 Independent variables Size..........................................................................................29
Capital Adequacy (CA).....................................................................................................30
Loan to Deposit Ratio........................................................................................................30
Management efficiency.....................................................................................................30
Funding cost.......................................................................................................................31
Real gross domestic product..............................................................................................31
Inflation rate.......................................................................................................................31
Foreign exchange Rate......................................................................................................32
Management Efficiency.....................................................................................................32
Bank Size...........................................................................................................................33
Liquidity Risk....................................................................................................................33
Capital adequacy................................................................................................................33
Funding costs.....................................................................................................................34
Real GDP...........................................................................................................................34
Inflation..............................................................................................................................35
Exchange rate.....................................................................................................................35
Loan to Deposit (LTDR)...................................................................................................36
4.2 Cost Budget.................................................................................................................37
CHAPTER FIVE...............................................................................................................38
CONCLUSIONS AND RECOMMENDATIONS............................................................38
5.1 Intoduction.................................................................................................................38
5.2 Conclusion...................................................................................................................38
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5.3 Recommendation.........................................................................................................39
Appendix............................................................................................................................44
COLLEGE OF BUSINESS AND ECONOMIC...............................................................44
PARADISE VALLEY UNIVERSITY COLLEGE...........................................................44
DEPARTMENT OF ACCOUNTING AND FINACE......................................................44
Part 1..................................................................................................................................44
Questionnaire for managers, supervisors and personnel’s................................................44
Part 2..................................................................................................................................46
Questionnaire of customers...............................................................................................46

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 List of Acronyms

CAP Capital
CBE Commercial Bank of Ethiopia
CLRM Classical Linear Regression Model
GDP Gross Domestic Product
HHI Herfindahl -Hirschman index
INFL Inflation
LIQ Liquidity
OLS Ordinary Least Square
ROA Return on Asset
ROE Return on Equity
RQ Research Question

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ABSTRACT

This study under the title assessment on factors affecting the profitability of commercial
bank of Ethiopia assela branch in Assela town will has want to know factors that will
affect the profitability of the bank. The general objectives of this study will be assessing
and investigating the main factors that will affect the banks profitability. There also
a specific objective in the study will be mention.
Both primary and secondary data will conduct primary data will be collect through
questionnaire, secondary data will collect from the allowable literature on the subject and
from published and unpublished materials.
The data will be analyze by using both qualitative and quantitative data analysis
particularly descriptive types of analysis will be used in the study is percentage, pi-chart
and tables. Pervasive sampling techniques has be used as a sampling techniques and the
obtained results will analyze using descriptive analyzing method. Finally based on the
result of findings, conclusion and recommendations will be forward.

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ACKNOWLEDGEMENT

First, we would like to thank almighty God that helps our through out our life.
Secondly, we would like to thanks our family of helps and also we like to express to
heart felt gratitude to our advisor MR.NIGUSE. At the end we would like to thanks
internet café and for their sponsored us their guidance and constructive suggestion in
completing this research .

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 CHAPTER ONE

INTRODUCTION

1.1 Background of the Study

Assessment of factors that affected the profitability of commercial bank of Ethiopia

asella branch have a significant impact to the development of the organization, by clearly
identified what factors was affect the growth of a market share, the level of service
quality, investment intensity, development expenditure, and what factors to be
appreciated , the study was hope that to un cover the law of market through in depth was
investigating and identifying of factors. In this study, the main focused area that the study
was concerned about identifying of factors affect profitability of commercial bank of
Ethiopia, in case study area, asella branch. The most factors was related to the emergence
of potential competitors, which was result a great impact on the market share of the
commercial bank of Ethiopia, and also in relation to this, the change in customers attitude
and preference in banking service such as loan services, money transfer, deposit services
and customer service of bank. This factors was affect the market share of the bank
largely and decrease in the market share.

1.2 Background of the organization

The history of bank in Ethiopia was dated back to the establishment of the bank of
Abysinia in 1905. The bank. Was the first bank in the history of Ethiopia, established
under the partnership of the government of Ethiopia and the national bank of Egypt. The
bank was continue to operate until 1931, later on, it with wholly purchased by the
government of Ethiopia and renamed “ The bank of Ethiopia” This bank was operate
until the Italian invansion in 1936.
From 1936-1942 (National bank these years was marked by the Italian occupations.
There were only a few Italian banks operating. After the victory over fascist Italy, the
state bank of Ethiopia was established by a proclamation issue in august 1942, Although
the international to establish it as a full fledged commercial bank, a year later, in 1943, it
was gives additional central banking functions until it was splited in 1963 to from the two
banks, the national and commercial bank of Ethiopia according with the issuance of the
monetary proclamation 1993, the national bank of Ethiopia and the commercial bank of
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Ethiopia was established to handle the national banking and commercial banking
functions respectively.
The state owned Commercial Bank of Ethiopia was still dominates the market interest of
assets, deposits, capital, and customer base and branch network, despite the growing
competition from private banks over the last 17 years. This was make of one of the most
reliable and strong Commercial Banks in the country and the region.
Its strong capital base, close to seven decodes of rich experience in the market and wide
branch network through out the country was enable the bank to accommodate the large
demands for its services, and was increase its overall revenue on sustainable basis.
The bank was the first bank in Ethiopia to introduced ATM (Automated teller machine)
Services for local users and currently commercial bank of Ethiopia will has about 4
million account holders. It has strong correspondent relationship more than 50 renewed
foreign banks and SWLFT bilateral arrangement with 500 others.
Pioneer to introduce western union money transfer services in Ethiopia commercial bank
of Ethiopia was here reliable and long standing relationships with many internationally
acclaimed banks throughout the world.
The Commercial Bank of Ethiopia was legally establish as a share company in 1963 to
take over the commercial banking activities of the state bank of Ethiopia, which was
founded in 1942 with two objectives of performing the duties of both commercial and
central banking. During the 1974 revolution, commercial bank of Ethiopia was get its
strength by merging with the privately owned Addis Ababa bank. Since then, it has have
been playing a significant role in the development endeavor of the country.
The commercial bank of Ethiopia, which is striving to become a world-class bank, is
rendering state of the art and reliable service to its millions of customers, both at home
and abroad. The business strategies of the bank was focus on the interest of the public it
serves. Commercial bank of Ethiopia at the end of 2018 has 1280 branches. Total asset
565.50 billion birr and also it has 34,879 employees.. (https://www.combanketh.et)
Commercial bank of Ethiopia Assela branch was established in 2008 ETC , and from the
establishment the bank pass through different governmental systems and banking
policies. The branch bank was far from Addis Ababa by 159km and from the district
(Adama ) the distance is 2km is far away. The bank mainly serve the people by accepting
deposits and lending money.

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 1.3 Statement of the Problem
The study was tries to assess factors affecting the profitability of commercial bank of
Ethiopia Assela branch under various competitive conditions. There is so many factors
that would affect profitability of business organization. Identifying those factors has a
great significance for the successful operation of the organization because these factors
would be a means for measuring the weakness and strengthens and to realize the
changing business environment.
The main factors that affect profitability of the banks was be highly related to the
emergence of new potential competitors in the market. In addition to this efficiency of
banking services to customers like money transfer, loan facilities, deposit services in
comparison to other competitors was another factors. Thus this study was try to access
those factors affect the profitability of commercial bank of Ethiopia in Assela branch and
tries to find answers for the following questions.
1 What are the effects of competition on banks market share and profitability
2 How customers feel about the service that are rendered by the bank.
3 By what method the bank control the effects of competitors.
4 What are the main factors affecting the profitability of the bank.

1.4 Objective of the Study

1.4.1 General Objectives of the Study

The general objectives of this study was to identify or assess factor that affect the
profitability of commercial bank of Ethiopia Assela branch was investigate different
factors that affect the development or growth of the organization.

1.4.2 Specific Objectives of the Study

The specific objectives of this study was included the following.
To identified the effects of competitor banks on the bank market share.
To evaluate the extent of customer service of the bank and was investigate the level of
customer satisfaction.
To analyze the factors affecting profitability of banks.
To examine the contribution of different services for the bank profitability.

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 1.5 Significance of the Study
The significance of this study included the following.
To Identified the factors that affect the profitability of the bank.
Suggest or propose solution for the identified problem based on the gathered information.
Would provided information to managers about the customers feeling or preference
towards the bank services and the competitors, strength and weakness.
Create awareness for managers about the changing business environment.

1.6 Scope of the Study

The overall scope of this study was focused on the extent to which the research objective
is concerned to avoid discrepancies, ambiguity, misunderstanding and other related
problems, in conducted to the research objectives.
The study was conduct on Oromia region,East Arsi,Assela town. So as to search or
critically would. investigated factors affected the profitability of commercial bank of
Ethiopia. Assela branch to reach on remarkable results from the study, by attempts the
answer to stated questions on the statements of the problem.

1.7 Limitation of the Study

The following limitations was affecting the research significance form generating
expected out comes or information.
This limitation is
Unwillingness of the managers in showing documents.
Illiteracy of the customers to answers the questionnaire.
Lack of experience on conducting research on the side of researcher.
Lack of time given to the research

1.8 Organization of study

The research report is organized into five Chapters. The first Chapter is made up of the
background of the study, the statement of the problem and research questions,
significance of the study, scope of the study, limitation of the study and organization of
the study. In Chapter two theoretical foundation and empirical review of the study is
presented. This chapter covers important issues related to the banking literatures,
empirical studies, types and natures of credit, principles of good lending, and general

12
lending procedures. Chapter three describes the research methodology. It explains the
study area, research design, population parameter, sampling methods, sample size and
methods of data collection and analysis. Chapter four discuss data presentation and
analysis. The fifth chapter is about conclusion and Recommendations

CHAPTER TWO

LITERATURE REVIEW

2.1 An Over view of commercial bank

Commercial banks exist because of the various services they provide to sectors of the
economy, e.g., information services, liquidity services, transaction cost services, maturity
intermediation services, money supply transmission, credit allocation services, and
payment services. Failure to provide these services or a breakdown in their efficient
provision can be costly to both the ultimate sources (households) and users (firms) of
savings, as well as to the overall economy. The effect of a disruption in the provision of
the various services on firms, households, and the overall economy when something goes
wrong in the commercial banking sector makes a case for the need to monitor
performance and market value and to impose regulations that in turn affect bank
performance and market value. For example, deterioration in a commercial bank’s
performance and value to the point that the bank fails may destroy household savings and
at the same time restrict a firm’s access to credit. Further, individual commercial bank
failures may create doubts in savers’ minds regarding the stability and solvency of
commercial banks in general and cause panics and even runs on sound institutions.
Although regulations may be beneficial to households, firms, and the overall economy,
they also impose private costs that can affect the performance and market value of
commercial banks. This special issue of the journal is devoted to issues examining
regulation, performance, and market value of commercial banks. The majority of the
papers take a combined look at a specific type of regulation and how the regulation
affects the performance and/or market value of commercial banks. Others look more
specifically at the impact of a particular regulation on the commercial banking industry as
a whole. Traditional financial system in Ethiopia has long history and paramount
contribution to economic betterment and social wellbeing of the society. Traditional
13
institutions organized with a sense of cooperation and risk sharing has enabled Ethiopians
to experience saving and financial management within its cultural context. Eqqub and
Edir are some of the informal financial institutions that shaped the social bond and
interaction (GebeyawAychile 2008).

Modern banking in Ethiopia was introduced after the agreement that was reached in 1905
Between Emperor Minilik II and Mr.Ma Gillivray, representative of the British owned
National Bank of Egypt. Following the agreement, the first bank called Bank of
Abyssinia Was inaugurated in Feb.16, 1906 by the Emperor. Within the first fifteen years
of its operation, Bank of Abyssinia opened branches in different areas of the country in
Harar(Eastern Ethiopia), Dire Dawa, Dessie and Djibouti. By 1931 Bank of Abyssinia
legally replaced by Bank of Ethiopia shortly after Emperor Haile Selassie came to power.
The new Bank, Bank of Ethiopia, was a purely Ethiopian institution, was the first
Indigenous bank in Africa, and established by an official decree on August 29, 1931 with
capital of £750,000. In 1941, another foreign bank, Barclays Bank, came to Ethiopia with
the British troops and organized banking services in Addis Ababa, until its withdrawal in
1943. Then on 15 April 1943, the State Bank of Ethiopia commenced full operation after
8months of preparatory activities. In 1945 and 1949, the Bank was granted the sole right
of issuing currency and deal in foreign currency. The Bank also functioned as the
principal commercial bank in the country and engaged in all commercial banking
activities.10 The National Bank of Ethiopia with more power and duties started its
operation in January1964. Following the incorporation as a share company on December
16, 1963 as per proclamation No.207/1955 of October 1963, Commercial Bank of
Ethiopia took over the commercial banking activities of the former State Bank of
Ethiopia. It started operation on January 1, 1964 with a capital of Eth. Birr 20 million. In
the new Commercial Bank of Ethiopia, in contrast with the former State Bank of
Ethiopia, all employees were Ethiopians. There were two other banks in operation
namely Banco di Roma S. and Bank of di NapoliS.C. that later reapplied for license
according to the new proclamation each having a paid up capital of Eth. Birr 2 million.
The first privately owned bank, Addis Ababa Bank Share Company, was established on
Ethiopians initiative and started operation in 1964 with a capital of 2 million in
association with National and Grind lay Bank, London which had 40percent of the total
share. In 1968, the original capital of the Bank rose to 5.0 million and until it ceased
14
operation, it had 300 staff at 26 branches. There were other financial institutions
operating in the country like:

Imperial Savings and Home Ownership public Association, which specialized in

providing loans for the construction of residential houses and to individuals under the
guarantee of their savings. Saving and Mortgage Corporation of Ethiopia whose aims and
duties were to accept savings and trust deposits account and provide loans for the
construction, repair and improvement of residential houses, commercial and industrial
buildings and carry out all activities related to mortgage operations. Agricultural Bank
that provides loan for the agricultural and other relevant projects established in 1945. But
in 1951 the Investment Bank of Ethiopia replaced it. In 1965,11 the name of the bank
once again hanged to Ethiopian Investment Corporation Share Company and the capital
rose to Eth. Birr 20 million, which was fully paid up. Following the declaration of
socialism in 1974, the government extended its control over the whole economy and
nationalized all large corporations. Organizational setups were taken in order to create
stronger institutions by merging those that perform similar functions. Accordingly, the
three private owned banks, Addis Ababa Bank, Banco di Roma and Banco di Napoli
Merged in 1976 to form the second largest Bank in Ethiopia called Addis Bank with a
capital of Eth. birr 20 million and had a staff of 480 and 34 branches. Then Addis Bank
and Commercial Bank of Ethiopia S.C were merged by proclamationNo.184 of August 2,
1980 to form the sole commercial bank in the country until the establishment of private
commercial banks in 1994.The Savings and Mortgage Corporation S.C. and Imperial
Saving and Home Ownership Public Association were also merged to form the Housing
and Saving Bank with working capital of Birr 6.0 million and all rights, privileges, assets
and liabilities were transferred by proclamation No.60, 1975 to the new bank. The
financial sector that the socialist oriented government left behind constituted only three
banks and each enjoying monopoly in its respective market, the following was the
structure of the sector at the end of the era: the National Bank of Ethiopia (NBE), the
Commercial Bank of Ethiopia, and Agricultural and Industrial Development Bank.
Following the demise of the Dergue regime in 1991 that ruled the country for 17 years
Under the rule of command economy, the Ethiopian People’s Revolutionary Democratic
Front declared a liberal economy system. In line with this, Monetary and Banking

15
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

2.2 Functions of commercial banks and the services rendered by them

The main function of commercial banks are borrowing and lending of money. They
borrow money by taking all kinds of deposits. Deposits may be received on current
account where by the banker incurs the obligators of paying tender after the expire of a
fixed period, or on deposit account where by the banker under takes to pay the customer
an agreed rate of him an agreed period of notice for withdrawals. Thus a commercial
banker, whether it be through current account society. Then be provides this money to
those who are or by discounting bulls of exchange or promissory notes. Thus a primary
function or a commercial banker is that of banker and a dealer in money to those who are
in need of it by granting over draft or fixed loans or by discounting bulls of exchange or
promissory notes. Of banker and adealer in money. By discharging this function
efficiently, a commercial bank renders very variable service to the community by
increasing the productive capacity of the country and there by accelerating the pace of
economic development. Thus we have seen that a banker receives deposits which he has
to repay according to his promises and makes them available to those people who are
really in need of them. E is actually distributing his deposits between the borrowers and
his own vaults. “Banking theory and practice, Shekhar and Shehar 18th edition.

2.3 Agency Service

Most of the commercial banks have an executor and trustee department; some many
have affiliated companies to deal with this branch of their business they aim is to provide,
therefore, a complete range of trustily executor or advisory services for a small change.
The business of banks acting as trustees, administrator, etc…, has continuously expanded
with considerable use fullness of their customers. Private companies wishing to set up
pension funds may appoint a bank as custodian trustee ad investment adviser, while
retaining the administration of the scheme in the hands of the management of the fund.
Most banks will undertake on behalf of this customers the preparation of income tax
returns and claims for the recovery of overpaid tax.

16
2.4 General usability services
These services are those in which the banker’s position is not that an agent for his
customer they include the issue of credit instruments like letter of credit and travelers
cheques, the acceptance of bills of exchange, the safe custody of valuables and
documents, the transaction of foreign exchange business, acting as a referce as to the
responsibility and financial standing of customers and providing specialized advisory
service to customers. By selling drafts or orders and by issuing letter of credit circular
notes, travelers checkes, etc… a commercial banker is discharging a very important
function.

2.5 Mechanism of credit deation

Banks always try to minimize their holding of idle cash to the lowest extent possible. In
their attempt to achieve this end, they unwittingly increase the total amount of money in
circulation in the community. It does not mean that they increase the total amount of
legal tender currency

2.6 Market competition and the challenges a head

It is clear and being increasingly realized by many bankers that banking is no more a
deposit taking and money lending institution, making profits on the deferential, not is it
an institution which could be run by bankers whose only qualifications were high
integrity, intuitive shrewdness, certain degree of impassivity, but not necessarily high
intellect. The banking industry is an increasingly competitive environment would face
new challenges and opportunities. It is time for them now to be proactive in their
approach and to anticipate the new demands on their skills that will be emerging and to
prepare for the same through appropriate adjustments in their organizational structure and
method of operations and procedures in an environment of operational flexibility and
internal autonomy. As competition and diversification exposes banks to new risks, sound
bank management becomes a precondition in the new area of financing liberalization.
Thus there arise a need for building strong management which is responsive to change
policy reform in the finical sector can be introduced on a durable basis only through
concrete efforts, to strengthen institutional frame work in which banks operate and
develop the necessary know how and human capital. “Michael E. Baker (1998)
“Dictionary of marketing and advertising 1998” Macmillan. Banks do need a

17
considerable degree of autonomy banks do need a considerable degree of autonomy so as
to be able to clearly define this operating role and strategy and perform their banking
business in a professional manner. Autonomy must also extended to the banks policies
relating to lending, financial management, and personnel.

2.8 Theory of Bank

How do banks operate and where does the money supply come from? The financial crisis
has heightened awareness that these questions have been unduly neglected by many
researchers. During the past century, three different theories of banking were dominant at
different times: (1) The currently prevalent financial intermediation theory of banking
says that banks collect deposits and then lend these out, just like other non-bank financial
intermediaries. (2) The older fractional reserve theory of banking says that each
individual bank is a financial intermediary without the power to create money, but the
banking system collectively is able to create money through the process of ‘multiple
deposit expansion’ (the ‘money multiplier’). (3) The credit creation theory of banking,
predominant a century ago, does not consider banks as financial intermediaries that
gather deposits to lend out, but instead argues that each individual bank creates credit and
money newly when granting a bank loan. The theories differ in their accounting treatment
of bank lending as well as in their policy implications. Since according to the dominant
financial intermediation theory banks are virtually identical with other non-bank financial
intermediaries, they are not usually included in the economic models used in economics
or by central bankers. Moreover, the theory of banks as intermediaries provides the
rationale for capital adequacy-based bank regulation. Should this theory not be correct,
currently prevailing economics modeling and policy-making would be without empirical
foundation. Despite the importance of this question, so far only one empirical test of the
three theories has been reported in learned journals. This paper presents a second
empirical test, using an alternative methodology, which allows control for all other
factors. The financial intermediation and the fractional reserve theories of banking are
rejected by the evidence. This finding throws doubt on the rationale for regulating bank
capital adequacy to avoid banking crises, as the case study of Credit Suisse during the
crisis illustrates. The finding indicates that advice to encourage developing countries to
borrow from abroad is misguided. The question is considered why the economics
profession has failed over most of the past century to make any progress concerning
18
knowledge of the monetary system, and why it instead moved ever further away from the
truth as already recognized by the credit creation theory well over a century ago. The role
of conflicts of interest and interested parties in shaping the current bank-free academic
consensus is discussed. A number of avenues for needed further research are indicated.

CHAPTER THREE

METHODOLOGY

3.1 Study Area

The study conducted on commercial bank of Ethiopia Sekekelo branch in Adama town
kebele 04 sub city that located in oromia regional state in East shoa zone, 99 Km far from
the capital city of Ethiopian (Addis Ababa)

3.2 Research design

In order to achieve the objectives of the study, the research undertakes descriptive
approach, using both qualitative and quantitative data. In doing so, the study intends to
describe, compare, contrast and interpret the existing facts and puts the status of NPL in
relation to various variables which will help to understand the issue and lead to causal
analysis. Further the research utilizes a survey as a research method. Secondary data are
obtained from publications of private banks and other financial institutions. Besides,
relevant information is also grasped from various books, research papers, magazines,
newsletters, websites and the like. Primary data are collected through questionnaires
distributed to respondents that involve Department Managers and Senior Officers
working on loan processing, such group involves Loan Officers, Credit Analysts, Credit
follow-up and Monitoring officers, Credit Directors, Relationship Managers and
Recovery Officers etc.

19
 3.3. Source of data

In this paper primary and secondary data will be used as a source of information.

3.4. Method of data collection

As the sources are identified above primary sources and secondary sources of data will be
used to get realistic information from concerned bodies.
In collecting primary data questioner will be used. The questioner may have both open
and close ended type. In order to collect secondary data bank document and other publics
will be extracted including finding of other related books.

3 5 Sampling techniques and sample size

For this study the researcher will use pervasive sampling techniques. For the total
population of 20 employees that the bank has the sample size will be 20x50% = 10.

3.6 Method of data analysis

After relevant data will be collected, the data will analyzed using descriptive statistics.
( quantitative data analyze method) will be used in the study. The data collected through
questionnaire, will analyzing using different statically tools like percentage and tables.

3.7. Research approaches

As noted in Creswell (2003, p.13) in terms of investigative study there are three common
approaches to business and social research namely, quantitative, qualitative and mixed
methods approach. Quantitative research is a means for testing objective theories by
examining the relationship among variables (Creswell 2009). On the other hand, 42
qualitative research approach is a means for exploring and understanding the meaning
individuals or groups ascribe to a social or human problem with intent of developing a
theory or pattern inductively (Creswell 2009). Finally, mixed methods approach is an
approach in which the researchers emphasize the research problem and use all approaches
available to understand the problem (Creswell, 2003).
Hence, based on the above discussions of the three research approaches and by
considering the research problem and objective, in this study, the quantitative method is
primarily used. However, to have a better insight and gain a richer understanding about
the research problem, the quantitative method is supplemented by the qualitative method
20
of inquiry. That is, to get the benefits of a mixed methods approach, as presented below,
and to mitigate the bias in adopting only either quantitative or qualitative approach, the
current research combines both quantitative and qualitative research approaches.
As noted in Greene et al. (1989, p. 259 cited in Yesegat 2009, pp.75-76) adopting a
mixed methods approach has a number of benefits. The first benefit is triangulation
pertaining to a situation where researchers seek convergence, corroboration,
correspondence of results from quantitative and qualitative methods to increase validity
of constructs and inquiry results. Secondly, by mixing methods complementarily,
researchers seek elaboration, enhancement, illustration, clarification of the results from
one method with the results from the other method. Thirdly, by mixing methods with
developmental intent, researchers seek to use the results from one method to help develop
or inform the other method. Fourthly, mixing methods with initiation intent seeks the
discovery of paradox and contradiction, new interpretations, the recasting of questions or
results from one method with questions or results from the other method. Finally, to
increase the scope of inquiry mixed method with expansion intent seeks to extend the
breadth and range of inquiry by using different methods for different inquiry components.
The following section hence presents the methods adopted in the study.
3.8 Methods adopted
As far as the purpose of this study is to identify factors affecting bank profitability in
Ethiopia and the researcher wants to both generalize the findings to a population and to
conduct an in-depth investigation, the current study adopts mixed methods approach.
Mixed method approach focuses on collecting, analyzing and mixing both quantitative
and qualitative data in a single study or series of studies. The decisive argument here is
that the use of both quantitative and qualitative approaches in combination provides a
better understanding of research problems than either approach achieves alone. Mixed
method research involves both collecting and analyzing quantitative and qualitative data
either sequentially or concurrently. Hence, the following sections present consecutively
the quantitative and qualitative aspects of the research method.
3.8.1. Research method: quantitative aspect
According to Leedy & Ormord (2005 cited in Semu 2010, p.45) survey research is a
common method used in business among quantitative strategies of inquiry that includes
experimental design on it. As a result, in order to generalize the findings to the whole

21
banks operated in the country, in the current study the researcher adopts survey research
method.
3.3.1.1. Survey design: documentary Analysis
Creswell (2003, p. 153) stated that the purpose of survey is to generalize description of
trends, attitudes, or opinions from a sample to a population so that inferences can be
made about some characteristic, attitude, or behavior of this population. Moreover, as
noted in Fowler (1986) it is also reasonable to use survey designs because of its benefits
such as the economy of the design and the rapid turnaround in data collection and
identifying attributes of a large population from a small group of individuals. Therefore,
it is logical to apply survey method for this study. The survey was carried out by means
of structured document review.
Data collection
In order to analyze the effect of bank specific factors on profitability of banks audited
financial statements of ) from for 2 consecutive years .i.e., from 2000-2011 were
collected. The secondary data that were collected through structured document reviews
are mainly from the records held by NBE and the banks themselves. Moreover, in order
to analyze the relationship that exists between profitability and macro-economic
variables, macroeconomic data were also collected for the same years. Those
macroeconomic data were mainly gathered from the records held by NBE and MoFED
through structured document review.
Data analysis techniques
To comply with the objective, the paper was primarily based on panel data, which was
collected through structured document review. As noted in Baltagi (2005) the advantage
of using panel data is that it controls for individual heterogeneity, less collinearity among
variables and tracks trends in the data something which simple time-series and cross-
sectional data cannot provide. Thus, the collected panel data was analyzed using
descriptive statistics, correlations, multiple linear regression analysis and inferential
statistics. Mean values and standard deviations were used to analyze the general trends of
the data from 2017 to 2018 based on the sector sample of 10. bank employees and a
correlation matrix was also used to examine the relationship between the dependent
variable and explanatory variables. A multiple linear regression model and t-static was
used to determine the relative importance of each independent variable in influencing
profitability. The multiple linear regressions model was run, and thus OLS was conducted
22
using EVIEWS 6 econometric software package, to test the casual relationship between
the firms‟ profitability and their potential determinants and to determine the most
significant and influential explanatory variables affecting the profitability of banks. The
rational for choosing OLS is as noted in Petra (2007) OLS outperforms the other
estimators when the following holds; the cross section is small and the time dimension is
short. Therefore, as far as both the above facts hold true in this study it is rational to use
OLS. In light of the above, to investigate the effect of bank-specific, industry-specific and
macroeconomic determinants of bank profitability, the following general multivariate
regression equation similar to Athanasoglou et al. (2008) and Sastrosuwito & Suzuki
(2011) was adopted:
= 𝛽𝜊+ 𝛽𝑗𝑋𝑖𝑡𝑗+ 𝛽𝑙𝐿𝑙=1𝐽𝑗=1𝑖𝑡𝑋𝑖𝑡𝑙+ 𝛽𝑚𝑋𝑖𝑡𝑚𝑀𝑚=1+ 𝜀𝑖𝑡 ; 𝜀=𝜈𝑖 + 𝜇𝑖𝑡
Where 𝝅𝒊𝒕 is the profitability of bank i at time t, with i=1… N, t=1… T, 𝛽𝜊 is a constant
term, 𝑿𝒊𝒕 ‟s the explanatory variables and 𝜺𝒊𝒕 the disturbance, with 𝝂𝒊 the unobserved
bank-specific effect and 𝝁𝒊𝒕 the idiosyncratic error. This is a one-way error component
regression model, where 𝜈𝑖 ~ IIN (0,𝜎𝜈2) and independent of 𝜇𝑖𝑡 ~ IIN (0,𝜎𝜈2). The
𝑿𝒊𝒕‟s are grouped into bank-specific 𝑋𝑖𝑡𝑗 , industry-specific𝑋𝑖𝑡𝑙, and macroeconomic
variables𝑋𝑖𝑡𝑚.
A fixed cross-sectional effect is specified in the estimation so as to capture unobserved
idiosyncratic effects of different banks. In addition, as noted in Gujarati (2004) if T (the
number of time series data) is large and N (the number of cross-sectional units) is small,
there is likely to be little difference in the values of the parameters estimated by fixed
effect model and random effect model. Hence, the choice here is based on computational
convenience. On this score, fixed effect model may be preferable than random effect
model (Gujarati 2004). Since the number of time series (i.e.2 year) is greater than the
number of cross-sectional units (i.e. 1 commercial banks) and adjusted R2 value and
Durbin-Watson state value increases with the use of cross-sectional fixed effect model,
fixed effect model is preferable than random effect model in this case.
As noted in Brooks (2008) there are basic assumptions required to show that the
estimation technique, OLS, had a number of desirable properties, and also so that
hypothesis tests regarding the coefficient estimates could validly be conducted. If these
Classical Linear Regression Model (CLRM) assumptions hold, then the estimators
determined by OLS will have a number of desirable properties, and are known as Best
Linear Unbiased Estimators. Therefore, for the purpose of this study, diagnostic tests are
23
performed to ensure whether the assumptions of the CLRM are violated or not in the
model. Thus, the following section discusses about the nature and significance of the
model misspesification tests.
3.3.2. Research method: qualitative aspect
In the current study qualitative data was gathered as a supplementary of the quantitative
one. In-depth questionnaire were the primary data collection technique in this study for
gathering data in qualitative methodologies. The questionnaire were conducted to the
bank managers of the selected bank(sekekelo) . In this study, the questionnaire was
totally unstructured. The respondents were contacted once and each respondent were
contacted at different times. The questionnaire were conducted to know about both the
internal and external factors affecting the profitability of commercial bank of Ethiopia
sekekelo branch and to what extent these determinants exert impact on banks
profitability. Furthermore, the questionnaire ‟ were asked about the major determinant
factors among the identified, the measures taken to reduce the effect of factors that
affects bank profitability negatively, and their opinion regarding the matter. In respect of
the method of analyzing the data collected from in-debth,questionnaires the results of the
interview are analyzed using triangulation with the findings of the structured record
reviews. As a result, the response of the questionnaire ‟ for the questions were used for
supporting the result obtained from analysis of structured record reviews or as arguments.
Finally, links between research question/hypotheses and variables on the one hand and
different data sources on the other hand are presented in table 3.2 below.
Research question and Variables Data sources
hypotheses

RQ1- What are the Factors affecting bank In-depth unstructured face-to-
determinants of banks’ profitability face interviews with Ethiopian
profitability in Ethiopia and commercial banks finance
how do those factors influence managers
the profitability of Ethiopian
banks’?
HP1: There is a significant Dependent variable: Bank-specific data from Income
positive/negative relationship Profitability statement and Balance sheet held
between the amount of capital Independent variables: by NBE and the banks and

24
of a bank and the bank’s Capital macroeconomic data from the
profitability. Operational efficiency records held by NBE and
Income diversification MOFED
Liquidity risk
Size
Asset quality
Concentration
GDP
Inflation

HP2: There is a significant negative relationship between the operational efficiency of a bank
and the bank’s profitability.
HP3: There is a significant positive relationship between the Income diversification of a bank
and the bank’s profitability.
HP4: There is a significant negative relationship between the liquidity risk of a bank and the
bank’s profitability.
HP5: There is a significant positive/negative relationship between the size of a bank and the
bank’s profitability.

HP6: There is a significant negative relationship between the quality of the assets of a

CHAPTER FOUR

DATA PRESANTATION AND ANALYISIS

4.1 Introduction
Under this section, presents the empirical results and discussions of the factor that affect
commercial banks profitability in Ethiopianbased on annual balanced panel data of the
selected banks (Sekekelo) over the period of 2017-2018. The regression analysis mainly
focused on the outcome the regression analysis for the internal and external factors taken
into consideration in this study and their impacts on profitability of commercial Bank of
Ethiopia sekekelo branch. The result of descriptive statistics of the selected variables, the

25
correlation matrix and regression analysis also reported. The panel data was diagnosed
for the presence of autocorrelation and The current chapter organized into four sections.
In the first sections 4.2, were presented the descriptive statistics of the dependent and
independent variables. The next, section 4.3 discussed test for the classical linear
regression model/CLRM. In Section 4.4 deals with correlation uanalysis. Then finally,
the results of regression analysis were presented under section 4.5

4.2 Descriptive Statistics

The table 4.1 presents the results of the descriptive statistics for main variables involved
in the regression model. The key descriptive measures are the mean, standard deviation,
the minimum and the maximum values of the variables over the period take in to account.
The summary statistics for all variables reported in the table below.
Table 4.1
variables Observati Mean Median Max Min Std. Dev.
ons
ROA 96 0.032 0.036 0.057 0.003 0.013
CAP 96 0.116 0.111 0.294 0.037 0.047
CIR 96 0.674 0.523 3.000 0.191 0.434
IDV 96 0.031 0.030 0.062 0.009 0.010
LIQ 96 0.372 0.364 0.594 0.201 0.093
SIZE 96 21.797 21.679 25.462 18.778 1.365
ASQ 96 0.133 0.087 0.535 0.000 0.118
HHI 96 0.512 0.486 0.732 0.352 0.127
GDP 96 0.086 0.108 0.126 -0.021 0.045
INFL 96 0.107 0.090 0.364 -0.106 0.118
Source: Financial statements of commercial bank of Ethiopia Sekekelo branch
all variables comprised 96 observations and the profitability measure used in this
study namely; ROA indicates that the Ethiopian banks attained, on average, a positive
before tax profit over the last twelve years. For the total sample, the mean of ROA was
3.2% with a minimum of 0.3% and a maximum of 5.7%. That means, the most profitable
bank among the sampled banks earned 5.7 cents of profit before tax for a single birr
invested in the assets of the firm. On the other hand, the least profitable bank of the
sampled banks earned 0.3 cents of profit before tax for each birr invested in the assets of
26
the firm. The standard deviation statistics for ROA was 0.013 which indicates that the
profitability of the selected banks was very small. The result implies that these banks
need to optimize the use of their assets to increase the return on their assets.
Regarding the explanatory variables of the model there are some interesting statistics that
have to be mentioned. Despite the small dispersion in the minimum and maximum
observation of ROA there could be seen relatively high variation in the equity to asset
ratio. On average, the equity-to-asset ratio equals 11.6% with a maximum of 29.4%,
which was considerably above the statutory requirement of 8% set by NBE based on
Basel II recommendation8, even if its minimum value was 3.7%. The standard deviation
statistics for capital strength was 0.047 which shows the existence of relatively higher
variation of equity to asset ratio of the selected banks compared to the variation in ROA.
On the other hand, the outputs of the descriptive statistics indicate that, the ratio of liquid
assets to total assets was 37.2%, on average, with a minimum of 20.1% and a maximum
of 59.4%. This means despite the inverse relationship that exists between liquidity and
profitability, the liquidity measure indicates that the banks have, on average, a higher
liquidity position which was somewhat higher than the statutory requirement of 20% for
the last two years. 8 Basel II is the second of the Basel Accords, which are
recommendation on banking laws and regulations issued by the Basel committee on
banking supervision. The purpose of Basel II is to create international standard that
banking regulators can use when creating regulations about how much capital banks need
to put aside to guard against the type of financial and operational risks banks face.
Furthermore, another interesting observation is that there was somewhat a higher
variation in the cost-to-income ratio indicated by the range between 300% and 19.1%.
The mean of the cost-to-income ratio equals 67.4%. The relatively higher range between
the minimum and maximum value implies that the most efficient bank has a quite
substantial cost advantage compared to the least efficient bank. It is especially important
to notice that the mean of industry concentration was 0.512, meaning that the industrial
concentration level of the banking sector during the analyzed period 2016-2018 was
highly concentrated. On the other hand bank size which is measured by natural log of
total asset had the highest standard deviation (1.365), which means it is the most deviated
variable from its mean compared to other variables. The smallest standard deviation was
reported in income diversification which was 0.010 and shows the existence of less

27
variation in commercial bank of Ethiopian Sekekelo branch in diversifying their source
of revenue.

4.3 Return on Asset (ROA)

Return on asset is one of the major proxies of the profitability of banks that indicates how
capable the management of the bank has been in converting Assets into net earnings. Net
profit after tax divided by total assets considered to estimate ROA for this particular
study. (Akbas, 2012). Bank profitability is best measured by ROA, because it represents
the best measure of the ability of a firm to generate returns on its portfolio assets
(Kosmidou, 2008; Naceur and Goaied, 2008). ROA indicates the profit earned per unit
asset and which is most important, it shows the management’s ability to utilize the banks
financial and real investment resources to generate profits. As Golin (2001) points out,
the ROA has emerged as a key ratio for the evaluation of bank profitability and has
become the most common measure of bank profitability in the literature. Therefore, ROA
is considered as more significant and a better profitability measure and dependent
variable.

3.6 Independent variables Size

Natural logarithm of book value of total assets is used as a proxy to measure bank size
and this proxy is able to capture the possible cost advantages related with the size (Sufian
& Chong, 2008). Bank size is usually used to explain for potential economies or
diseconomies of scale in the banking sector. Furthermore, bank size is associated with
diversification which may impact favorably on risk and product portfolio. Economies of
scale will reduce the cost of gathering and processing information (Boyd et al., 1993) so
that a positive effect of bank size is associated with profitability. Also, the empirical
researches conducted by Alper & Anbar (2011) in Turkey and Alexiou & Sofoklis (2009)
in Greek found that bank size positively related to bank’s profitability. They explained
that the positive relationship between bank size and bank’s profitability evidenced that
larger bank can achieve economies of scales.
HP1: Bank size has positive and significant effect on bank profitability. 23

28
 Capital Adequacy (CA)
Athanasoglou et al. (2008) report that capital refers to the amount of own funds available
to support a bank’s business and therefore, bank capital acts as a safety net in the case of
adverse developments. Bourke (1989), Hassan and Bashir (2003) and Samuel (2015),
find a positive relationship with financial performance that a well-capitalized bank face a
lower cost of going bankrupt which reduces their costs of funding and risks.
HP2: Capital adequacy has positive and significant effect on bank profitability.
Liquidity risk
Liquidity is the amount of short term responsibilities that could be met with the amount
of liquid assets. It measures the ability of banks to meet short-term obligation or
commitments when they fall due. Molyneuxand Thorton (1992), Samuel (2015) and
Amdemichael (2012) comes to a conclusion that there is a negative and significant
relationship between level of liquidity and profitability. Guru et al. (2002) also find a
negative relationship between liquidity and bank profitability.
HP3: Liquidity risk has positive and significant effect on bank profitability.

Loan to Deposit Ratio

Loan-deposit ratio is a ratio between the banks total loans and total deposits. The study
carried out by Rengasamy, (2014) attempt to evaluate the impact of loan to deposit ratio
on ROA for locally owned commercial banks in Malaysia for the period of five years
from 2009 to2013. In general, the study indicates that there was a positive impact on loan
to deposit ratio to the profitability (ROA) of the banks.
HP4: loan to deposit ratio has positive and significant effect on bank profitability.

Management efficiency
It is one of the influential factors that determine the bank profitability. The ratio of
operating expense to operating income will use as the proxy of efficiency of bank
management and higher
ratios reflect a less efficient management Habtamu (2012). Indranarain (2009), Bourke
(1989) and Molyneux and Thornton (1992) used operating expense to operating income
and stated that Higher the efficiency level of a bank, higher its profits level. Hence a
positive relationship is expected between efficiency and profitability of banks. The study

29
conducted by Samuel (2015), determinants of commercial banks profitability in Ethiopia
found positive but insignificant relationship to bank profits.
HP5: Management efficiency has positive and significant effect on bank profitability.

Funding cost
Funding cost used as one of a key proxy variable in this study. It is a ratio between
interest expenses to deposits, which is defined as the interest expense on customer
deposits expressed as a percentage of average customer deposits. This rate reflects the
ability of a bank to attract deposits at a low cost. Thus, a low level of this indicator has a
positive effect upon the profitability of the bank. According to Samuel (2015), found that
funding cost had a negative and significant impact on commercial banks profitability in
Ethiopia.
HP6: Funding cost has positive and significant effect on bank profitability.

Real gross domestic product

This variable is one of the best measurements to determine the total economic activities
of a country. Changes in GDP reflect the changes in consumption, investment,
government spending and net export, consequently changes in GDP is expected to affect
supply and demand for loans and deposits. The gross domestic product growth is the
annual change in the GDP. According to Bikker et al. (2002), Moges (2017),
Amdemichael (2012) and Athanasoglou et al., (2008), found that there is a positive
association between economic growth and financial sector profitability. We anticipate
therefore a positive correlation between GDP growth and profitability.
HP7: GDP has positive and significant effect on bank profitability.

Inflation rate
This is one of important environmental condition which may affect both costs and
revenues of most organizations including the banking institutions. Inflation is the rate at
which the general level of prices for goods and services is rising in economy overtime.
Kutsienyo (2011) found that inflation has a positive impact on commercial banks
profitability in Ghana. The study pointed out that inflation used as a signal that bank
managers are able to forecast accurately inflation and are proactive in managing
anticipated inflation. By making accurate forecast of inflation, the manager can increase

30
the rates on loan faster than the rate at which operating cost is increasing so that inflation
favorably impacts on profitability. in line with the (Bourke, 1989; Molyneux et al., 1992;
Athanasoglou et al. 2005 and Tesfaye 2014), found positive relationship between
inflation and bank’s profitability, they indicated that inflation is anticipated by bank
which give opportunity for the bank to adjust the interest rate according to the expected
inflation rate, therefore it enables the revenue to be increased faster than the costs.
HP8: Inflation has positive and significant effect on bank profitability.

Foreign exchange Rate

Foreign Exchange risk arises due to the fluctuations in the exchange rates. Exchange rates
can affect the performance of commercial banks because of their funding and get back in
the form of dollar or foreign currency so that the income received is also dependent on
the fluctuation of exchange rates is going on. Therefore, the risk of exchange rate plays
an important part of the company's profit generated. According to Davydenko (2010) the
exchange rate depreciation has a positive significant effect on income which could be
explained by the ability of banks managers to anticipate exchange rate fluctuations. In
line with the Aburime (2008) and Gemechu (2016), found that exchange rate is
significant macroeconomic determinants of bank portability.
HP9: Foreign exchange rate has positive and significant effect on bank profitability.

Management Efficiency
As expected, Management efficiency has a positive and statistically significant impact on
bank profitability. The result shows that, a positive coefficient of 0.0376360 and
significant at 5% significance level (p-value =0.021). The outcomes imply that, an
increase (decrease) in the expenses results, decrease (increases) the profits of banks. The
positive relationship also in line with the results of prior studies Habtamu (2012), and
Bourke (1989). The empirical finding of this
Study is also contrary to the results of Birehanu (2012) who analysed the determinants
of commercial bank profitability in Ethiopia and find out that the management efficiency
has a negative significant impact on profitability. Furthermore, the finding of Samuel
(2015), revealed that the management efficiency has a positive and insignificant
association with profitability. Thus the hypothesis that stated earlier, there is no
significant relationship between management efficiency and profitability rejected.

31
 Bank Size
Size is used to capture the impact of bank size on profitability, and is measured as the
logarithm of (LBS) total assets. The result indicates that size is positively related to
profitability and statistically insignificant at 1%, 5%, and 10% significance level (p-value
= 0.3550). However, the coefficient 0.003087 indicates that when the log of the bank size
increases by 1 unit, the other things remain constant profit (ROA) of the bank will
enhanced by 0.3%. According to the result of this study, size does not lead any type of
profitability for the commercial banks. The advantage of the economies of scale is not
available for attaining the profit. The result is in line with Shih et al. (2007), in Chinese
banks using several bank-specific factors and Tesfaye (2014), who studied the
determinants of Ethiopian commercial banks performance. The study result is refuting
with the finding of (Melaku, 2016; Birehanu, 2012; Amdemichael, 2012; Samuel, 2015;
Habtamu, 2012; Moges, 2017; Habibullah, 2009 and Kosmidou, 2008), among other
found statistically significant and has a positive impact on bank profitability.

Liquidity Risk
Regarding to liquidity risk, the results implies that the effect of liquidity was statistically
significant at 10% of significance level (p-value=0.0652) and has a positive influence on
profitability (ROA). The result revealed that, the increase of liquid asset leads to the
enhancement of profitability. The empirical finding provides support to earlier study by
among others (Eichengreen and Gibson, 2001; Sufian and Habibullah, 2009; Gemechu,
2016; Melaku, 2016 and Birehanu, 2012). According to Chinoda (2014), the availability
of liquidity is influences profitability since it enhances the capacity of the bank to acquire
cash, in order to fulfil present and essential needs. Therefore, for commercial banks to
gain public assurance, they should have sufficient liquidity to meet the demands loan
holders and depositors needs. The finding is opposing with the study result of
(Molyneuxet et.al.1992; Amdemichael, 2012 and Samuel, 2015) comes to a conclusion
that a negative association exists between liquidity and profitability.

Capital adequacy
Surprisingly, capital adequacy statistically insignificant at the 10% significance level (p-
value=0.8112) and have an inverse relationship with profit. The result is in line with
Weersainghe & Perera (2013), determinants of profitability of commercial banks in Sri

32
Lanka. Similarly, Tesfaye (2014), who studied the determinants of Ethiopian commercial
banks performance and found that the capital adequacy is not a significant driver of
profitability performance of commercial banks. Hence, regulatory measures that insist on
holding a high level of capital seems to strengthen the risk bearing capacity of banks than
improving their profit performance. The results appear in contradiction with the study of
(Gemechu, 2016; Melaku, 2016; Birehanu, 2012; Amdemichael, 2012; Samuel, 2015;
Habtamu, 2012; Ermias, 2016 and Athanasoglou et al. 2008) that argues that capital has
positive and significant impact on bank profitability. Moreover, the finding is in line with
the Risk Return Theory argues that capital and bank profitability are negatively
associated (Saona, 2011, Ommeren, 2011). The theory suggests that increasing risks by
increasing leverage of the bank leads to higher expected returns. This suggests that if a
bank intends to increase its profits by increasing leverage, the equity to asset ratio
(capital) has to be reduced. In contrary, Bankruptcy Cost Theory explains that the
positive link between capital adequacy and profitability. If the bankruptcy costs are
unexpectedly high due to the environmental changes, banks will need to hold more equity
and increase their capital ratio in order to reduce the expected value of bankruptcy cost
and avoid financial distress.

Funding costs
As expected, the impact of funding costs on profitability (ROA), the result implied that
the coefficient of the variable is negative and statistically significant at 1% significant
level (p-value=0.0000). The results imply that, an increase (decrease) in funding cost has
an effect of increases (decrease) profits. A fact that supports that the study conducted by
Samuel (2015).

Real GDP
The growth of GDP was statistically significant at 5% significance level (p-value 0.0319)
and has a negative relationship with profitability. The coefficient of -0.094663 in the
regression output indicates that GDP is a quite significant determinant of banks
profitability in Ethiopia under the study period. The results show that one-unit increase in
GDP will contribute 0.094663 unit decrease in return on assets. Moreover, higher GDP
growth leads to lower bank profitability in Ethiopia. This result is agreed with the studies

33
by Tan et.al, (2012). The negative relationship is in contrast with the findings of
(Birehanu, 2012; Amdemichael, 2012; Samuel, 2015; Habtamu, 2012 and Moges, 2017),
which stated that positive and significant association among GDP and bank profitability.
The negative coefficient sign of real GDP growth rate was beyond to the researcher
expectation.

Inflation
The other macroeconomic factor inflation had statistically significant at 1%. The
coefficient 0.017242 indicate that, the inflation affects the bank profitability positively.
When inflation of the countries increases by 1-unit, the other things remain constant the
profit will increase by 0.017242 units. This may imply that bank management may
anticipate the rate of inflation and react accordingly. Consequently, commercial banks in
Ethiopia tend to be more profitable in inflationary environments. The result is in line with
the finding of (Athanasoglou, Brissimis and Delis, 2005; Tesfaye, 2014; Moges, 2017;
Molyneux and Thornton 1992, and Guru, Staunton and Balashanmugam, 2002)
established positive relationship between inflation and bank profitability. Contrariwise,
the studies conducted by Abreu and Mendes (2000) in Europe found a negative
relationship between inflation and bank profitability. According to Samuel (2015) and
Amdemichael (2012), inflation is not a significant driver of profitability performance of
commercial banks. As the probability of the regression result for this variable is
0.0005.Thus, the hypothesis that stated earlier, there is no significant relationship
between inflation and profitability will be rejected

Exchange rate
The proxy for foreign exchange rate was the official exchange rate it refers to the
exchange rate determined by national authorities or to the rate determined in the legally
sanctioned exchange market. The output of the regression analysis proves the existence
of positive or direct relationship between foreign exchange rate and profitability of
Ethiopian banks.
The coefficient of foreign exchange rate was positive and not statistically significant.
Hence, the effect of foreign exchange rate on Ethiopian banks profitability is not
significant. As per the output foreign exchange rate is not a determinant factors of banks
profitability and insignificant as indicated by the large p-values of 0. 1980.The result is in

34
line with the finding of Samuel (2015) and against the study of Gemechu (2016), argued
that exchange rate has a positive and significant impact on bank profitability.

Loan to Deposit (LTDR)

Concerning the impact of loan to deposit ratio, the result of the regression output shows
that, it is statistically significant at 1% significance level (p-value=0.00000) and has a
positive impact on profitability (ROA). This means, it describes that one Birr given as a
loan from a deposit has the effect of Birr 0.039911on bank’s profitability in Ethiopia. the
result of this study is also contrary to the finding of Moges (2017) that argued there is a
negative and significant association among LTDR and bank profitability. Logically
Higher loan to deposit ratio indicates, commercial banks has issuing more of its deposit
in the form of interest bearing loans, consequently banks can have generating more profit.
But if the ratio is too high banks may default in the repayment of loan. Too low loan to
deposit ratio is also a risk for commercial banks

4.1. Time Budget

No Activity Months
Jan Feb Mar Apr May Jun Jul Agus
1 Topic selection xx
2 preparation of research proposal xx
3 Recommendation of comments xx
to first draft of the proposal
4 Typing of final proposal Xx
5 Submission of proposal Xx
6 Data collection Xx
7 Data analysis Xx
8 Submission of first draft of Xx
research report comments
9 Typing of final report Xx
10 Submission of final research Xx
11 Presentation xx

35
4.2 Cost Budget

Item Quantity Duration in Unit cost Total cost

day per day (Birr)
Personal cost
Researcher 10 30 300
Transpiration around
Adama
10 50 500
Typist 300
Equipment
Printing 100 0.60 cent 60
Paper 2 reams 75 150
Pen 6 7.00 42

Pencil 3 2br 6

Robber 2 1.50 cent 3.00

Miscellaneous expense 150
Total 1511

36
 CHAPTER FIVE

CONCLUSIONS AND RECOMMENDATIONS

5.1 Intoduction
In this chapter the conclusions and recommendations are discussed. For clarity purpose,
the conclusions are based on the research objectives of the study. Based on the findings
of the study recommendations are made to government bodies, to commercial bank of
Ethiopia and suggestion for other researchers. The summaries and conclusion founded on
this research were depending on the result analyzed, discussion and also assess the factors
that affect the profitability of commercial bank of Ethiopia in case study of Sekekelo
branch

5.2 Conclusion
This research was conducted with the main objective to identify the factors that affects
the profitability of commercial bank of Ethiopia in case of Sekekelo branch. since the
factors that influence and impact on bank profitability and to find out to what extent these
determinants affect the commercial bank Ethiopian profitability. The factors were
identified in to two main categories; the internal factors and the external factors. The
internal factors refer to the factors that are originated from bank accounts (balance
sheets and/or profit and loss accounts) and could be called micro or bank-specific factors
of profitability. While, the external factors are variables that are not related to bank
management but are related to the economic and legal environment that affects the
operation and performance of the firms. This study investigates the impact of both
internal and external factors that affect the commercial bank of Ethiopian Sekekelo
branch profitability. The internal factors included in this study are variables such as banks
size, management efficiency, loan to deposit ratio and capital ratio, liquidity risk and
funding cost. While, as external factors are used three variables gross domestic product,
foreign exchange rate and inflation rate. Furthermore, the study used Return on Asset
(ROA) as the main measure of bank profitability. Panel data (fixed effects model) from

37
2016 to 2018 commercial bank of Ethiopia was analysed using ordinary least square
(OLS) regressions method.
The liquidity risk has a positive impact on ROA with strong significance coefficient. This
indicates that as banks that hold more liquid asset experience less significant increase in
profitability. On the other side, the study found a capital adequacy ratio has negative and
statistically insignificant impact on ROA of commercial banks in Ethiopia Sekekelo
branch . However, this indicates banks with strong capital adequacy or keep the fund in
the bank will have a cost and the bank will loss the profit which should be earns if the
money was borrowed.As expected, the result showed a negative relationship between
funding cost and profitability with statistical significance. This shows that as minimizing
commercial bank of Ethiopia sekekelo branch interest expense would certainly improve
the banks performance.
Loan to Deposit has positive and statistically significant impact on ROA.

5.3 Recommendation
In line with the findings of the study, the following recommendations have been
forwarded. From the results obtained from the regression analysis the result suggested
that, among balance sheet variables loan and advance and fixed deposit was the major
factor that can positively and negatively contribute to the profitability of commercial
banks in Ethiopia. Therefore, commercial banks of Ethiopia Sekekelo branch should
focus on increasing public awareness to mobilize more savings; this will enhance their
performance in provision of loans and advance to customers.
Additionally, commercial banks should not only be concerned about internal
structures and policies, but they must consider both the internal environment and the
macroeconomic environment together in fashioning out strategies to improve their
profitability. Finally, the study sought to investigate factors affecting profitability of
commercial banks of Ethiopia Sekekelo branch For comprehensive investigation future
researcher could increase the number of observations by increasing the sample size and
extending the period of time with unbalanced data. In addition, future research could
cover cross countries to capture countries differences and to uncover difference from
financial system and regulation

38
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46
 Appendix

COLLEGE OF BUSINESS AND ECONOMIC

RIFT VALLEY UNIVERSITY ASSELA CAMPUS

DEPARTMENT OF ACCOUNTING AND FINACE

Part 1

Questionnaire for managers, supervisors and personnel’s

47
will disgned to collect information for assessing factors affecting the profitability of
commercial bank of Ethiopian Sekekelo branch from the managers, supervisors and
personnels of the bank.
Please fill the questions provided below
Remark, no need of writing your name
Part I. Questionnaire about personal data
1. General background
1.1. Age __________
1.2. Gender Male  Female 
Education status:
College diploma  first degree  masters 
Part II. Questionnaire about the organization
2. What are the different type of banking service rendered by the bank currently?
__________________________________________________________
3. Is the bank profitable? Yes  No 
If the answer is no, what is the reason?
____________________________________________________________
__________________________________________________________
4. What type of credit program is the bank utilize?
Term loan  Short term loan  Overdraft 
Merchandize loan  Agricultural loan 
5. What is the different types of securities required by the bank for advancing the loan?
_________________________________________________________
______________________________________________________________
Does the bank satisfied with this securities sufficiently
Yes  No 
6. What is the method of charging securities to cover the advanced loans of the bank?
_________________________________________________________
______________________________________________________________
7. Is there any decrease in the numbers of borrowers due to the emergence of new
competitions?
Yes  No 

48
 If the answer is Yes, what is the reason and by what amount the number of
customers decrease? _____________________________________________
______________________________________________________________
______________________________________________________________
8. Does the bank gives advice for borrowers?
Yes  No 
9. What is the main problem in advancing and repayment of loan?
________________________________________________________________________
________________________________________________
10. Does the bank satisfy all customer’s banking needs?
Yes  No 
11. Is there any difference on the market share of the bank due to the entrance of new
competitor banks and micro financing institution in to the market
Yes  No 
If the answer is Yes, what is the difference and in what amount?
___________________________________________________
12. What is the bank strategy to compete with the competitor to maintain its market
share. ________________________________________________
13. What are the main problem that the bank currently faces? ________________

Part 2

Questionnaire of customers
This questionnaire will design to collect information for assessing factors affecting the
profitability of commercial bank of Ethiopia from the customers of the bank. So you will
kindly request to complete this questionnaire genuinely and honestly.
Please full the questions provided below. Remark, no need of writing your name
Part I – Questioner about respondent personal data
1. General background
1.1. Age ____________
1.2. Gender Male  Female 
Education status:
49
Merchant  Farmer  Employee  Trader
If there is other specify __________________________
Part II- Questionnaire about the organization
2. What kind of service do you use?
Saving account services  current account services 
Money transfer services  loan services 
3. Does the bank satisfy all your banking service needs?
Yes  No 
If your answer is no, what is you’re an satisfied banking needs? _____________
_______________________________________________________________
_______________________________________________________________
4. How much you interested or satisfied in the service rendered by the bank? Comparing
with the other
Very much  Little 
If your say very much, what is your reason? ______________________
__________________________________________________________
If you say little, list your reason _______________________________
_________________________________________________________
5. What is the bank contribution for your business activity and personal life?
_______________________________________________________________
6. Have your ever ask the bank for a loan previously?
Yes  No 
6.1. If your answer is Yes, for what purpose ___________________________

6.2. If your answer is No, why don’t you ask a loan______________________

____________________________________________________________
7. Which type of the bank borrowing system do you use previously?
Short term loan  medium term loan 
Long term loan  merchandize loan 
Agricultural loan 
8. How much you are satisfied by the bank borrowing system
Very much  Little  Unsatisfied 
8.1 If you say very much, on what way the bank satisfied you?
50
 ___________________________________________________________
8.2 If you say little, why __________________________________________
___________________________________________________________
8.3 If you say unsatisfied, what is the reason? ________________________
___________________________________________________________
___________________________________________________________
9. What type of security required by the bank, when the loan is advanced by the bank
______________________________________________________________
10. Do you face any problem when you ask the bank for a loan?
Yes  No 
If you say yes, what was the problem ________________________________
______________________________________________________________
11. Does the organization employees treat you well?
Yes  No 
12. What is the main problem of the bank comparing to other private bank?
_______________________________________________________________
13. Are you using other private bank?
Yes  No 
14. Are you satisfied by other banks service?
Yes  No 

51