Determinants of Private Bank Profitabliy Essay Example

an improvement in the foreign sector or overall economy has a significant positive effect on corporate profitability.

Background

The financial sector plays multiple roles in meeting the economy's requirements as a conglomeration of financial institutions.

The service is provided through three main functions: intermediation or allocation, operational, and payment systems. Financial intermediaries provide operational and allocative functions by offering financial resources to meet borrowing needs. Their main microeconomic function is providing facilities for collecting and investing saving funds. Financial institutions are also expected to provide a reliable payment mechanism. Therefore, the performance of a financial institution is often measured based on these key roles in the banking business.

The performance of a bank is heavily dependent on the provision of various functions. Therefore, the assessment of how internal and external factors affect these functions is crucial in determining the overall operational performance of a specific bank or the financial sector as a whole. This assessment plays a significant role in management decision-making by highlighting critical operational variables, identifying existing issues or opportunities, and addressing key policy inquiries. However, evaluating a bank's performance is a complex procedure that entails examining the interaction between the environment, internal activities, and external activities.

There is currently no agreement on a specific set of indicators that are most appropriate for evaluating financial soundness or creating effective early warning systems. Therefore, this study aims to systematically assess the static and dynamic relationship between profitability and various internal and external competitive factors using longitudinal data spanning eight years.

Objectives of the Study

The primary goal of the study is to discover systematic evidence concerning the key factors influencing the corporate

profitability of private commercial banks in Ethiopia.

The text aims to assess the operational performances and profitability of private commercial banks in Ethiopia. It also seeks to analyze the major components of operational profit and investigate the factors that influence bank profitability. Additionally, the research aims to provide input for sector-specific stress testing and offer insights into policy implications for private commercial banks in Ethiopia.

Data ; Methodology

I gather information from the annual reports of six specific private commercial banks in the sector, as well as from relevant government organizations.

The data used to evaluate internal performances will be generated from the Balance Sheets and Financial Statements of the banks mentioned. This study employs descriptive statistics and rigorous longitudinal data analysis procedures. It utilizes static and dynamic panel data estimation methods to incorporate prudential indicators of financial soundness.

Scope ; Limitation of the Study

The study looks at the performances of selected private commercial banks from 1999/00 to 2006/07 fiscal year. However, due to difficulties in obtaining comprehensive data and limited information about the sector, the study primarily relies on officially reported accounting data, major macroeconomic indicators, and a few sector-specific secondary data. The study may face accuracy challenges due to the limited observation period and lack of data.

In this paper, limited parameters with strong significance are used to explain the model. The remaining sections are organized as follows:
- Chapter 2 provides a brief description of the major operational performances of private banks in Ethiopia over the past eight years.
- Chapter 3 includes a concise literature review.
- Chapter 4 presents the data source and the construction of the study's overall sample.
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Chapter 5 discusses the methodology, empirical results, and their implications.
- The final chapter concludes with recommendations.

An overview of the major operational performances of private banks in Ethiopia.

Operational Performances

Private commercial banks in Ethiopia have shown impressive operational performances over the reported eight fiscal years. The average annual growth rate for total deposits has been 32%. However, Table 1 indicates that the rate of increase for total deposits has been decreasing. This can be attributed to the increasing stockpile and reflects the competitive nature of the sector and possible limitations in resources due to the dichotomous nature of the economy.

The annual average growth rate of demand deposits has exceeded that of saving and fixed time deposits in private commercial banks. Despite this, saving deposits continue to be the primary source of deposits, followed by demand deposits. For example, saving and demand deposits account for approximately 63% and 26% of the total average yearly deposits in the private commercial banking sector. These respective shares have remained relatively stable during the reported period. Table 1: Deposit Performance of Private Commercial Banks Deposits Demand Saving Fixed.