The Determinants of Financial Distress: Empirical Evidence from Banks in Ethiopia (original) (raw)
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Banks and Bank Systems, 2019
The study aims to investigate the impact of determinants of financial distress on financial sustainability of Ethiopian commercial banks. The balanced panel data of 12 commercial banks of Ethiopia have been taken for the study from 2011 to 2017. The research deploys Ordinary Least Square (OLS) Regression Model. The indicators of financial distress are bank's specific internals and macroeconomic factors. The proxies of financial sustainability are Return on Assets, Return on Equity, Financial Stability Index and Bank Soundness. The findings reveal that the Absolute Liquidity Risk and Net Income Growth are found to be positive and significant and Solvency Risk negative and significant in relation to Return on Assets. Asset Quality is found to be positive and significant and Solvency Risk negative and significant with respect to Return on Equity. The Asset Quality and Net Income Risk are positive and significant and Solvency Risk is negative and significant with relation to the Financial Stability Index. Absolute Liquidity Risk and Liquidity Risk are positive and significant and Credit Risk negative and significant with Bank Soundness. Free Cash Flow and Net Income Growth are essential for enhancing Return on Assets and Bank Soundness, and managing equity within the prudential norms could bring forth short-term financial sustainability of commercial banks. By lowering provisioning of loan loss, Growth in Net Interest Income and managing Solvency Risk could ensure financial stability to the banks, which in turn leads to financial sustainability. The study reveals that financial sustainability of banks is insulated from the exposures of systematic risks originating from macroeconomic factors.
African Journal of Business Management, 2018
This study aims at examining the determinants of the financial performance of private commercial banks in Ethiopia. The study uses secondary data for eight private banks which are in the industry for more than ten years. These banks are chosen from sixteen private commercial banks which are currently functional in Ethiopia banking industry. The data for this study is obtained from annual reports of the banks, minutes and the national bank report. Correlation and multiple linear regressions of panel data for the eight banks for the years 2007 to 2016 is analyzed using random effect model. E-Views 9 software was used for analyzing the data. Return on Asset and Return on Equity are the selected dependent variables while non-performing loan, capital adequacy ratio, bank size, leverage ratio, credit interest income ratio, loan loss provision ratio and operation cost efficiency were the independent variables. Results show that Capital Adequacy Ratio (CAR), Credit Interest Income (CIR) and Size of the bank (SIZE) have positive and statistically significant effect on financial performance. Non-performing Loans (NPLs), Loan Loss Provision (LLP), Leverage Ratio (LR) and Operational Cost Efficiency (OCE) have negative and statistically significant effect on banks' financial performance. The study suggests that Ethiopian commercial banks are advised to manage their loan loss, be cost efficient, and fix their leverage ratio at maximum level to enhance their profitability.
Determinants of Commercial Banks Financial Performance in Ethiopia
2016
This study examines the determinants of financial performance of commercial banks in Ethiopia by using panel data of seven sample commercial banks out of eighteen commercial banks operated in Ethiopia over the period 2000-2014. Since the data is secondary in nature, the quantitative approach to research was used. Besides, the random effect model was used. Under this study, both internal and external factors were included. The internal factors used in this study include capital adequacy, Asset quality, Earning ability, liquidity management and Bank size whereas, the external factor is foreign exchange rate. Moreover, ROA, ROE and NIM were used to measure the financial performance. This study runs a redundant fixed effects test using Hausman specification test. Hence based on the result random effect model was adopted. Based on the regression result; asset quality, earning ability and bank size have a significant influence on the financial performance of Ethiopian commercial banks mea...
Determinants of Commercial Bank Financial Performance: Empirical Evidence From Ethiopia
The study examines factors that determine the financial performance of commercial banks in Ethiopia by using time series data over the period 2004-2019 on the sample of seven banks using secondary data. Moreover, the autoregressive distributed lag model was used. Under this study, both internal and external factors were included as the determinants of bank performance which was measured by loan-to-deposit ratio. The internal factors used in this study include capital adequacy ratio, non-performing loan and loan growth while the external factors are real GDP growth and inflation. Based on the results, specific variables except non-performing loan capital adequacy and loan growth affect banks performance significantly in the long run. In the short run, in addition to those two variables, non-performing loan also affects bank performance. Real GDP growth has negative significant effect on the banks performance in both long and short run. Inflation has insignificant effects on bank performances in both long and short run.
Factors Contributing to Financial Distress in Commercial Banks of Kenya
Zenodo (CERN European Organization for Nuclear Research), 2023
Commercial banks could provide important benefits to economies and facilitate the objectives of financial liberalization, by boosting competition in banking markets, stimulating improvements in services to customers and expanding access to credit, especially to domestic small and medium-scale businesses. But the attainment of these benefits has been jeopardized because commercial banks have been vulnerable to financial distress. Substantial numbers of banks have failed, mainly because of non-performing loans. Poor loan quality has its roots in the informational problems which afflict financial markets, and which are at their most acute in developing countries, in particular problems of moral hazard and adverse selection. The Kenyan financial sector plays major roles in the country in promoting economic growth and development. However, financial distress is one the challenges that is hindering commercial banks from continuing contributing according to their potential to the GDP wellness. Some of the banks such as Imperial bank limited, Chase bank and Dubai Bank have been put under statutory management of late. For the purpose of attempting to unfold the issues of major concern, it was necessary to assess the factors contributing to financial distress in commercial banks. The specific objectives of this study were based on financial leverage, liquidity, credit risks and capital adequacy. It was further guided by relevant theories; modern portfolio theory, agency theory, pecking order theory and cash management theory. The study used research works particularly the ones published in the journal articles which were related to the topic under the study. This was supplemented by information in books concerning financial distress and commercial banks. The information was analyzed through content analysis by considering all the constructs used. The research designs adopted were also put into account. Meta-analysis research design was used to analyze these research works in the academic journals. The findings are of importance to commercial banks and Central bank. It provides information that can help them prevent and manage financial distress. The study found out that financial distress leads to poor performance and failure in commercial banks. The study also showed that financial distress had a significant effect on financial performance of banks where performance was negatively affected. A rise in financial distress led to a decrease in financial performance and vice versa. Both descriptive and inferential findings showed that financial distress in commercial banks was contributed by leverage, liquidity, credit risks and capital adequacy. The study established the need to reduce financial distress by ensuring financial stability in banks to ensure shareholders confidence. It was recommended that banks should adopt appropriate credit management strategies to control their lending. They should also make effective decisions on the means to fund their operations in different economic and financial conditions. This should indicate when equity or debt funds are suitable. Central banks should be stricter on their regulations concerning liquidity and capital reserves of the commercial banks.
Financial Distress and Occurrence of Financial Crisis: A Study of Commercial Banks in Ghana
Divine Atinyo, 2021
Financial distress has been stated by many researchers as one of the major causes of financial crisis; especially, among commercial banks. However, stakeholders of Ghana's financial sector in general and the banking industry, specifically, appeared to pay less attention to the possible nexus between financial distress and likelihood of occurrence of financial crisis; possibly due to scarcity of empirical literature in this area. This study, thus, assessed the relationship between financial distress and financial crisis among commercial banks in Ghana, employing annual data for the period 2010-2019 from 22 commercial banks selected using the criterion sampling technique. The binary logistic regression was used for estimation of the relationship between financial distress and financial crisis. Financial distress was proxied by Altman's Z-score, whilst financial crisis was dichotomised. Results revealed financial distress to have a significantly positive effect on the odds of occurrence of financial crisis among commercial in Ghana. It was recommended that leadership of commercial banks in Ghana be proactive in their actions towards minimising threats posed by financial distress to ensure that they do not escalate into crisis.
A Study on the Factors Affecting the Financial Performance of Select Commercial Banks of Ethiopia
This study examines the Analysis on financial performance determinants: A study on selected commercial Banks in Ethiopia. Among the total of 17 public and private sector banks by using Purposive sampling technique 9 banks have been selected for the study. Quantitative research approach was adopted by using secondary data by using panel data of banks over a period of ten years (2006-2015). The fixed effect model was chosen rather than random effect model based on the hausman specification test result. In order to realize the objectives of the study multiple regression models was employed. Banks specific factors considered CAMEL approach and the key macroeconomic factors such as gross domestic product, inflation rate and foreign exchange rate were also included to analyze the banks financial performance in terms of ROA and ROE, Accordingly, the result revealed that Capital adequacy has positive and significant impact on bank financial performance of return on asset, and Earning ability and liquidity management has negatively and significant impact on bank financial performance of return on equity, On the other hand, variables such as Gross Domestic Variable has positively impact on both return on asset (ROA) and return on equity (ROE).
Determinants of Financial Performance of Private Commercial Banks in Ethiopia
Academy of Accounting and Financial Studies Journal, 2021
This study was aimed to investigate determinants of financial performance of private commercial banks in Ethiopia. The study has employed explanatory research design in quantitative research approach. An audited financial statement of private commercial banks was used for the period 2010 to 2019 to carry out the study. Out of the 16 private commercial banks; eight (8) banks were selected as sample using purposive sampling based on the banks' age and experience. The data were analyzed using descriptive and inferential statistics such as correlation analysis, Random and Fixed effect regression analysis. The finding of the study indicates that microeconomic factors namely; capital adequacy, asset quality, liquidity position and number of bank branch had positive and significant effect on return on asset (ROA) & return on equity (ROE) of private commercial banks in Ethiopia. From macroeconomic factors interest rate had a negative significant effect on return on asset and had no effect on return on equity. Similarly, Gross Domestic Product had negative and significant effect on return on asset (ROE) & had insignificant effect on return on asset (ROA) of private commercial banks in Ethiopia. Therefore, the private commercial banks should give due consideration on improving those internal factors since they significantly and positively affect their financial performance. Similarly, the concerned executive body should get updated information about coming change GDP and interest rate and adjust their bank functions according to change in the environment and be efficient since these factors had negative and significant impact on bank financial performance.
Determinants of Financial Performance: An Empirical Study on Ethiopian Commercial Banks
2014
This study examines the determinants of financial performance of commercial banks in Ethiopia by using panel data of banks over the period 2002-2013. Since the data is secondary in nature, the quantitative approach to research was considered. Besides, the fixed effect model was used. The fixed effect model is preferred to the random effect model based on the hausman specification test. Under this study, both internal and external factors were included. The internal factors used in this study include capital structure; Income Diversification, operating cost and bank size whereas the external factors are effective tax rate, real GDP growth and inflation. Moreover, ROA and NIM were used as the performance measure. Based on the regression result, all bank specific variables except bank size affect performance of the bank significantly but negatively. However, bank size affects performance significantly and positively. In addition to this, macroeconomic factors have no significant effect on the performance of banks except the tax rate which negatively but significantly affects ROA.
The effect of credit risk on financial performance of commercial banks in Ethiopia
2018
This study attempts to reveal the relationship between credit risk and financial performance of commercial banks in Ethiopia. In order to investigate these study quantitative research approach is employed based on documentary analysis. A panel data from six selected commercial banks covering the ten-year period (2007-2016) is analyzed within the fixed effects model on regression analysis and using E-view8 software. The study used one dependent variable return on asset (ROA), four independent variables that are: nonperforming loan to total loan and advance ratio (NPLTLA), loan provision to total loan and advance ratio (LPTLA), total loan and advance to total deposit ratio (TLATD) and the ratio of non-performing loan to loan provision (NPLLP) as measures of credit risk. Both descriptive statistics and regression analysis specifically fixed effects model were used to analyze the relationships of the depended variable with explanatory variables. The regression result show that non-perfo...