Determinants of bank profitability in Ethiopia: does political stability matter?

Abstract

This study analyses the impact of political stability and other customary covariates, namely, bank-specific, industry-specific, and macroeconomic determinants on the profitability of banking sector in Ethiopia using two-step system GMM estimator. The study employed a panel data of 17 commercial banks for the period of 2012 to 2022, consisting of 187 bank-year observations. The regression outcomes reveal that political stability has a negative and statistically significant impact on the profitability of banks in the case of Ethiopia. This means that bank’s profitability declines as the country’s political instability rises. Moreover, the regression results reveal that the profitability of banks in Ethiopia is shaped by other customary variables, which are bank-specific, industry-specific, and macroeconomic variables. The findings are stout and dependable as another model specification is undertaken. To the researcher’s knowledge, the present study is the first to analyse the effect of political stability on the profitability of banks in Ethiopia. As a result, it provides better insights for the policymakers, regulators, bank managers, analysts, and other interested parties to improve the profitability of Ethiopian banks.