Published Online:July 2026
Product Name:The IUP Journal of Accounting Research & Audit Practices
Product Type:Article
Product Code:IJARAP020726
DOI:10.71329/IUPJARAP/2026.25.3.24-41
Author Name:Mikias Tesfaye Gugssa
Availability:YES
Subject/Domain:Finance
Download Format:PDF
Pages:24-41
The paper investigates the determinants of profitability in Ethiopia’s commercial banking sector using a balanced panel of 11 banks over 2010-2019, incorporating both public and private institutions. Unlike previous studies, it examines income diversification and funding cost, while explicitly addressing the persistence of profitability and potential endogeneity using a dynamic panel model (System Generalized Method of Moments; System GMM). The analysis reveals that bank-specific factors, size, capital adequacy, operational efficiency, and income diversification are the primary drivers of profitability, whereas liquidity risk negatively affects performance. Among macroeconomic variables, real GDP growth positively influences profitability, while inflation and exchange rate fluctuations are statistically insignificant, reflecting Ethiopia’s semi-regulated financial environment. Economic interpretation indicates that a 1% increase in GDP growth or bank capitalization produces meaningful improvements in return on assets (ROA), highlighting the practical implications for bank management. The findings underscore that internal management strategies, efficient operations, capital strengthening, and revenue diversification are more critical than external macroeconomic conditions for enhancing profitability. The study provides evidence-based guidance for bank managers and regulators to improve financial stability and performance in emerging, regulated banking systems.
The banking sector serves as the circulatory system of a modern economy, playing a critical role in mobilizing savings, facilitating investments, and efficiently allocating financial resources (Levine, 2005). In emerging economies such as Ethiopia, where capital markets are underdeveloped, commercial banks dominate the financial landscape and carry a disproportionate responsibility in driving national economic development. Consequently, the stability and performance of banks are not merely financial concerns but are closely linked to macroeconomic stability and growth.