Date of submission: February 2, 2020; date of acceptance: March 5, 2020. * Contact information: muktarabdala11@gmail.com, Ethiopian Telecommunication Corporation, 378 Jimma, Oromia, Ethiopia, phone: +251917242699. ** Contact information: kenenisalemi@gmail.com, College of Business and Econom- ics Jimma University, 378 Jimma, Oromia, Ethiopia, phone: +251912065549. *** Contact information: egutu2013@gmail.com, College of Business and Economics Jimma University, 378 Jimma, Oromia, Ethiopia, phone: +251913759922; ORCID ID: htt- ps://orcid.org/0000-0002-1357-6477. Copernican Journal of Finance & Accounting e-ISSN 2300-3065 p-ISSN 2300-12402019, volume 8, issue 4 Shifa, M.A., Debela, K.L., & Tarfa, E.G. (2019). Determinants of the profitability of commercial banks in Ethiopia. Copernican Journal of Finance & Accounting, 8(4), 185–201. http://dx.doi. org/10.12775/CJFA.2019.024 Muktar abdela shifa* Ethiopian Telecommunication Corporation kenenisa leMMi debela** Jimma University endalew gutu tarfa*** Jimma University deterMinants of the profitability of coMMercial banks in ethiopia Keywords: health, profitability, determinants, commercial banks, pooled OLS, Ethiopia. J E L Classification: G20, G21, G28. Abstract: The healthiness of the banks is critical because they are highly fragile, vul- nerable and closely integrated with other sectors. One way of testing the healthiness of the banks is through the measure of their profitability. Profitability is the prima- ry objective of any business including commercial banks. Profitable banks can with- stand any negative shocks and stabilize the whole financial sector. The main objective Muktar Abdela Shifa, Kenenisa Lemmi Debela, Endalew Gutu Tarfa186 of this study was to analyze the determinants of the profitability of commercial banks in Ethiopia. To achieve this objective a secondary source balanced panel data of ten years from nine commercial banks were used, and internal determinants; business mix indicators, risk aversion index, management efficiency, liquidity risk, bank size, and external determinants; ownership, market concentration, and GDP, were regres- sed against return on asset by using the pooled OLS technique. Results indicated that internal determinants were more important than external factors. Thus business mix indicators, risk aversion index, management efficiency, liquidity risk and bank size had a significant effect on the return on asset, whereas except ownership other external de- terminants, i.e. market concentration and GDP were insignificant to determine return on assets of Ethiopian commercial banks. Finally bank managers were recommended to rely on the debt financing sources paying a due attention to the optimal levels, mobilize more deposits, extend loan provision and expand business mixes services.  Introduction Background of the study Since the 17th century the banking industry has been serving as the most important financial sector of any economy of the world. The performance of banks can progress or stagnate the economies of countries. It is better to re- mind that the banking sector was the major contributing factor in both the great depression of the 1929 as well as the 2008’s economic recession. The in- come of the country and its economic level, inf lation rates, economic policies, exchange rates across the world, and laws and regulations are considered as certain macroeconomic factors that can inf luence the success or failure of the banks regardless of the countries they are situated. Diversification plays an important role in a bank’s desirable efficiency; its costs could be associated with higher income volatility, implying higher risk (Doan, Lin & Doong, 2018). Ignoring measures of non-traditional activities in the estimation of bank ef- ficiency can be misleading, although at least two studies find little or no impact of off-balance sheet activities (Jagtain, Saunders & Udell, 1995 and Kosmidou, Tanna & Pasiouras, 2008 cited in Doan, Lin & Doong, 2018) on the examination of cost or profit efficiency. The health of the banking sector is critical because they are economically important and closely integrated with other sectors (Devis, 1995). One way of testing healthiness of banks is through the measure of their prof- itability. Commercial banks with a better financial performance have a better dEtErminants of thE ProfitaBility of CommErCial Banks in EthioPia 187 ability to resist any negative shocks and contribute to the stability of the finan- cial sector (Athanasoglou, Sophocles & Delis, 2008). Since the banking sector is the major player in the economic development of nations, a close watch for the factors that can affect the performance of commercial banks is crucial for the managements, investors and policy makers. Statement of the problem Finance is a life blood of industry, commerce and trade. The banking industry is serving as a backbone in any modern business activities. A bank is a financial institution in which a substantial part of its business consists of mobilization of deposits and providing loan and advances. It plays an intermediary role by mobilizing and channeling scattered financial resources from temporarily sur- plus societies to deficit productive investments. Banks provide savers a return on their deposit by means of interest, and charge interest by lending the same money to borrowers. This smooth f low of funds facilitates the development of the overall economy (Praveen, 2011). Objectives of the study The main objective of this study is to examine the determinants of bank profit- ability in Ethiopian commercial banks. And achieved the following specific ob- jectives; 1. Investigate the effect of bank specific factors, i.e. Business mix indica- tors, risk aversion index, management efficiency, liquidity risk and bank size, on the profitability of commercial banks in Ethiopia. 2. Analyzes the impact of external factors, i.e. market concentration, ownership, and GDP growth rate, on the profitability of commercial banks in Ethiopia. Research Hypothesis The following hypotheses were developed in line with the specified objectives. A; HO: there is significant relationship between risk aversion index and profitability of commercial banks in Ethiopia. Muktar Abdela Shifa, Kenenisa Lemmi Debela, Endalew Gutu Tarfa188 B; HO: there is significant relationship between management efficiency and profitability of commercial banks in Ethiopia. C; HO: there is significant relationship between business mix indicators and profitability of commercial banks in Ethiopia. D; HO: there is significant relationship between Market concentration and profitability of commercial banks in Ethiopia. E; HO: there is significant relationship between GDP and profitability of commercial banks in Ethiopia. F; HO: there is significant relationship between ownership and profitabili- ty of commercial banks in Ethiopia. G; HO: there is significant relationship between Liquidity risk and profita- bility of commercial banks in Ethiopia. H; HO: there is significant relationship between Bank size and profitability of commercial banks in Ethiopia. Literature Review According to Banking Regulation Act, “Banking means the accepting for the purpose of lending or investment of deposits of money from the public, repay- able on demand or otherwise and withdraw able by cheque, draft, and an order or otherwise” (Praveen, 2011). In the economy banks perform a multitude of functions. However, the three primary functions in an economy: the operation of the payment system, the mobilization of saving and the allocation of savings to investment projects. By allocating capital to the highest value use while limiting the risks and costs in- volved, the banking sector can exert a positive inf luence on the overall econo- my, and is thus of broad macroeconomic importance (Roland, 2011). Theory of the banking firm is different from the theory of the firm which is widely applicable to any business with the exception of banks. Theory of the banking business underlined that banks make profit by selling liabilities with one set of characteristics (a particular combination of liquidity, risk, size, and return) and using the proceeds to buy assets with a different set of character- istics through the process of asset transformation (Mishkin & Eakins, 2012). By allocating capital to the highest value use while limiting the risks and costs involved, the banking sector can exert a positive inf luence on the over- all economy, and is thus of broad macroeconomic importance (Roland, 2011). dEtErminants of thE ProfitaBility of CommErCial Banks in EthioPia 189 The impact of banking activities on monetary statistics, such as money sup- ply figures and credit extension to the domestic private sector, is also of con- cern to policy makers. Reviews of banks can serve as a structured mechanism to ensure that monetary authorities recognize and quantify non intermediat- ed funding and lending, as well as other processes that are important to policy makers in the central bank. The advantage of a structured approach to evaluat- ing banks is that banking sector behavior is considered in a systematic and log- ical manner, making sector statistics readily available for macroeconomic mon- etary analysis. Bank supervisors are thereby placed in a position where they are able to meaningfully assist monetary authorities, whose policies are inf lu- enced by developments in the banking sector (Greuning & Bratanovic, 2009). Empirical literature review Profitability of financial institutions specifically banks are affected by inter- nal and external factors. Bank profitability is usually measured by the return on assets, and is expressed as a function of internal and external determinants (Dietrich & Wanzenried, 2009). A study by Habtamu (2012) for the period of 2002 to 2011, on the determi- nants of the profitability of private commercial banks in Ethiopia, proxies re- turn on asset, return on equity and net interest margin as a measure of profit- ability. Million, Matewos and Sujata (2014) for study period from 2003 to 2014 on the impact of credit risk on profitability found that nonperforming loan ratio have a negatively significant effect, and loan loss provision have positively sig- nificant, while capital adequacy ratio and loan to deposit ratio have insignifi- cant impact on the profitability of commercial banks in Ethiopia. The research methodology and the course of the research process Research design To achieve the study objective as well as to test the hypothesis, the study em- ployed quantitative research design by analyzing secondary source balanced panel data. The quantitative research is a means for testing objective theories by examining the relationship among variables. Muktar Abdela Shifa, Kenenisa Lemmi Debela, Endalew Gutu Tarfa190 Data Sources and data collection techniques The study used only secondary source data. Secondary data generally provide a source of data that is both permanent and available in a form that may be checked relatively easily by others, i.e. more open to public scrutiny. Sampling design The total population for this study constitutes all commercial banks operat- ing in Ethiopia. For the study a ten years data is used. So purposive sampling of commercial banks which started operating before 2007 is included in this study this is because of majority of the Banks in the country has age of less than ten years. As a result out of the 17 banks currently operating in the country nine banks, namely commercial bank of Ethiopia, Dashen, Abysinia, Weagen, United, Nib, Cooperative bank of Oromia and Lion bank, are selected because they have 10 and more year’s age in the bank industry. Finally the result is in- ferred for the whole population. Data analysis Techniques The data, after collection, was processed and analyzed in accordance with the outline laid down for the purpose at the time of developing the research plan. This is essential for a scientific study and for ensuring that we have all relevant data for making contemplated comparisons and analysis. Technically speak- ing, processing implies editing, coding, classification and tabulation of collect- ed data so that they are amenable to analysis. After collecting the row data it is edited, coded and tabulated. Model Specification Regression analysis is a statistical methodology that utilizes the relation be- tween two or more quantitative variables so that a response or outcome varia- ble can be predicted from the other, or others. This methodology is widely used in business. dEtErminants of thE ProfitaBility of CommErCial Banks in EthioPia 191 The model adopted for the analysis can be re-written as follows: ROAi,t = α + β1(capta)i,t + β2(Bmix)i,t + β3(GexOPin)i,t + +β4(LOANDEP)i,t + β5(BS)i,t + β6(OWN)i,t + β7(HH_TA)It + +β8(GDP)it + εi,t (1) Where: ROA = Return on Asset Capta = Capital to total asset GexOPin = General expanses to operating income LOANDEP = Loan to deposit Bmix = Business mix (service charge and commission income to total operat- ing income) BS = bank size (Total asset) OWN = Ownership HHI_TA = Herfindhal-Hirschman Index in terms of total asset GDP = Real GDP growth rate ε = the error term t = time (in year) i = individual bank Capital adequacy Capital adequacy ratio is measured by the proportion of banks equity capital to total asset. Studies found that the relationship between capital adequacy ratio and banks profitability is negative. The higher the ratio of equity to asset ra- tio the higher will be the risk aversion ability of the banks, but this high capital adequacy ratio also negatively impacts the profitability, growth capability and competitive ability of banks (Ezike & Oke, 2013). Bank size (Asset) The effect of bank size on the profitability of commercial banks is limited up to certain extent. As the size of the banks increase profitability also increases, but beyond certain extent the impact will be negative (Athanasoglou, Sopho- cles & Matthaios, 2005). Goddard, Molyneux and Wilson (2004) also found pos- itive relationship between bank size and bank profitability. Muktar Abdela Shifa, Kenenisa Lemmi Debela, Endalew Gutu Tarfa192 Liquidity risk Liquidity risk is basically a bank’s inability to meet the cash demand of its cus- tomers. It indicates the ability of the bank to deal with deposit withdrawals and loan demands (Million, Matewos & Sujata, 2014). The higher amount of loans against per dollar deposit increases bank liquidity risk (Samad, 2015). Amde- mikael (2012) concluded that the relationship for liquidity risks found to be statistically insignificant on the profitability of commercial banks in Ethiopia. Management efficiency Ongore and Kusa (2013) believe that management efficiency is a complex sub- ject to capture with financial ratio, and it is still one of the key determinants that affect the bank’s profitability. Generally, the operating profit to income ra- tio, the ratio of cost to total asset, and the ratio of net interest expense to net interest income, were used by prior studies to measure management efficien- cy. Among these researchers Nessreddine, Fatman and Anis (2013), Mulualem (2015) used the above last two ratios respectively. Business mix indicators Service Charge & Commission Income to total income ratio is used to represent the business mix for the banks. Although fee based services in general gener- ates lesser income than loans, it is expected to add something on banks profit and have a positive relationship with profitability. The share of income from service charge and commission is found to be one of key drivers of the perfor- mance of Ethiopian Banks (Tesfaye, 2014). The Herfindahl - Hirschman Index (HHI) The relation of HHI to bank profitability is not certain because many of these market structure studies do not provide consistent support for the approach that there is a direct relation between concentration and profitability (Patria, Capraru & Ihnatov, 2015). The result of their study on the EU 27 banking sys- tem found that market concentration diminishes bank profitability. Thus com- petition has a positive impact on the banks profitability. dEtErminants of thE ProfitaBility of CommErCial Banks in EthioPia 193 Economic growth (GDP) According to Herald and Heiko (2009), economic growth is one of the deter- mining factors for commercial banks deposits. Therefore, increase in GDP in- creases wellbeing of the society, which inf luences the growth of commercial banks profitability positively. Simiyu and Ngile (2015) in Kenya found that from 2001 to 2012 real GDP growth rate had positive but insignificant effect on the ROA of banks. Tan and Floros (2012) found a negative relationship between GDP growth and bank’s profitability in China over the period from 2003 to 2009. Tesfaye (2014) founds that the real GDP growth rate which measures the economic growth of Ethio- pia from 1990-2012 had insignificant impact on performances of commercial banks. Return on assets Return on Asset is the appropriate measure for management’s efficiency by in- dicating its ability to utilize the company’s asset in generating returns. Return on assets is the net profit after tax divided by total assets, and it indicates the returns generated from the assets financed by the bank. This is probably the most important single ratio in comparing the efficiency and oper- ating performance of banks as it indicates the returns generated from the as- sets that bank owns. The ROA formula is as follows: ROA=Net Income/Average Total Assets Ownership A study by Abebaw and Kapur (2011) on the financial performance and own- ership structure of Ethiopian commercial banks found that private banks had better profitability, asset quality and capital adequacy performance and public sector banks were better in cost management measures. Similarly Yidersal and Wang (2017) concluded that there was a significant impact of ownership struc- ture on the profitability of commercial banks measured by ROE. Muktar Abdela Shifa, Kenenisa Lemmi Debela, Endalew Gutu Tarfa194 Table 1. Summary of variables and their measurement Variables Notation Proxy Dependent Return on asset ROA Net income/total asset independent variables Business mix Bmix Commission & service charge/total opera- ting income Liquidity Risk LOANDEP Total loan/total deposit Capital adequacy or risk aversion capta Equity/total asset Bank size(Asset) BS log total asset Management efficiency GNexOPin Generalexp/operating income Bank concentration (HHI_TA) Sum of the square of market share (Herfindhal-Hirschman Index) Economic growth GDP %ge of real GDR growth Ownership OWN 0=private 1=Government S o u r c e : own competition, 2018. Results and conclusions In this sub section a general overview of the data used for the analysis is pre- sented. Each variable consists of ninety observations, i.e. a panel with ten years and nine cross sections (bank). The mean, median, standard deviation, maxi- mum and minimum values of each variable were tabulated as follows. Table 2. Summery statistics Mean Median Maximum Minimum Std. Dev. Observations ROA 0.029182 0.032200 0.049400 -0.0376 0.011998 90 OWN 0.111111 0.000000 1.000000 0.000000 0.316030 90 GEXOPIN 0.677786 0.366672 16.65205 -16.36671 2.790958 90 LOANDEP 0.610032 0.591408 0.967004 0.296870 0.121911 90 HHI_TA 0.434219 0.449075 0.459838 0.378287 0.028413 90 GDP 10.22820 10.35250 11.79500 7.958000 1.123022 90 dEtErminants of thE ProfitaBility of CommErCial Banks in EthioPia 195 Mean Median Maximum Minimum Std. Dev. Observations CAPTA 0.136860 0.125736 0.507519 0.044576 0.060806 90 BS 9.067999 9.018887 12.39009 5.583496 1.298482 90 BMIX 0.184467 0.181074 0.444737 0.000000 0.080835 90 S o u r c e : own competition, 2018. The mean for the return on asset indicates 2.92 percent. That is in the past 10 years from 2007 to 2016 commercial banks in Ethiopia were making a profit of 0.0292 cents on average per unit birr investment on asset. The maximum ROA between these years was 4.94 percent and the minimum is a loss of 0.0376 cents per each birr. The loss in ROA is due to the inclusion of newly established banks in the sample, for which startup cost for new bank over weights their revenues. The ratio of general expense and loan loss provision to operating income is considered as a proxy for management efficiency in controlling expenses. The mean figure is 0.6778 which indicates that on average, 67.78 percent of the operating income of commercial banks in Ethiopia goes to general expenses. These expanses are non-interest expenses excluding employee salary and ben- efits. The maximum amount is 16.65 and the lowest is -16.367, the negative amount is due to higher startup costs faced by newly established banks. For which operating expenses are higher and operating income is at negative be- cause of infancy stage of the business. The variability in operating expanse be- tween the banks is 2.79. Ownership has coded 1 and 0 for the government and private banks respec- tively. Therefore the mean value is 11.11 percent, which means among the sam- pled nine banks 11.11 percent is government owned, and the rest 88.8 percent are private banks. Here even if it is only one Government owned bank it is giant and dominant one in the country. Capital to total asset ratio is a proxy used to measure the risk aversion in- dex of the banks. On average 13.68 percent of the bank’s asset is financed by share holders’ equity while the remaining 86.32 percent is debt. The maximum amount of asset covered by equity capital is 50.75 percent while the minimum is only 4.46 percent. The deviation between the banks is 6.61 percent which Table 2. Summery… Muktar Abdela Shifa, Kenenisa Lemmi Debela, Endalew Gutu Tarfa196 shows higher variability of capital financing between the Ethiopian commer- cial banks. With regard to business mix indicators which are measured by the ratio of service charge and commission to total operating income from interest and non-interest sources. Herfindhal-Hirschman Index in terms of asset measures the bank concen- tration in the banking industry of the country. GDP is one factor among the macroeconomic determinants of bank profitability. Test for Multicollinearity One of the assumptions in the ordinary least squares is that explanatory varia- bles were not perfectly correlated with one another. The statistical method for testing multicollinearity is analyzing the correlation coefficients between ex- planatory variables or variance inf lation factor (VIF) Gujarati (2004). Accord- ingly, in this data the variance inf lation factor for all variables is below 10. This indicates that there is no problem of multicollinearity. Table 3. Correlation index between explanatory variables Table 3. Correlation index between explanatory variables Source: own competition, 2018. Model specification Tests Random effect versus Pooled OLS (Breusch and Pagan LM test) The pooled OLS is a pooled linear regression without fixed and/or random effects. It assumes a constant intercept and slopes regardless of group and time period. Regression Results and interpretations The general objective of this study is to find out the determinants of bank profitability in the Ethiopian commercial banks. A panel data of ten years from the sampled nine commercial banks were used to achieve the specified objectives and answer the hypothesized statements. Table 4. Regression output Source: own competition, 2018. Regression output The regression model is set as follows; BS 1.0000 BS BS -0.6976 0.0196 0.0655 0.1931 -0.3396 0.6970 -0.4573 LOANDEP 0.2721 0.2563 -0.1229 0.1666 0.1634 -0.4815 1.0000 OWN -0.4293 -0.0613 -0.1037 -0.0000 -0.0000 1.0000 GDP 0.1623 -0.1688 -0.1816 -0.1881 1.0000 HHI_TA 0.0980 -0.0178 0.0577 1.0000 Bmix -0.0906 0.0120 1.0000 GNexOpin -0.1844 1.0000 capta 1.0000 capta GNexOpin Bmix HHI_TA GDP OWN LOANDEP _cons -.0228835 .027418 -0.83 0.406 -.0774367 .0316697 BS .0035123 .0017717 1.98 0.051 -.0000128 .0070374 LOANDEP .0213929 .0089832 2.38 0.020 .0035192 .0392666 OWN -.0095011 .0040068 -2.37 0.020 -.0174734 -.0015288 GDP .0010893 .0010112 1.08 0.285 -.0009227 .0031013 HHI_TA .0029155 .0342972 0.09 0.932 -.0653252 .0711562 Bmix .0488447 .0115105 4.24 0.000 .0259424 .0717471 GNexOpin -.0013142 .0007116 -1.85 0.068 -.0027301 .0001017 capta -.089917 .044769 -2.01 0.048 -.1789932 -.0008408 ROA Coef. Std. Err. t P>|t| [95% Conf. Interval] Robust Root MSE = .00876 R-squared = 0.5147 Prob > F = 0.0000 F( 8, 81) = 5.88 Linear regression Number of obs = 90 S o u r c e : own competition, 2018. dEtErminants of thE ProfitaBility of CommErCial Banks in EthioPia 197 Model specification Tests Random effect versus Pooled OLS (Breusch and Pagan LM test) The pooled OLS is a pooled linear regression without fixed and/or random ef- fects. It assumes a constant intercept and slopes regardless of group and time period. Regression Results and interpretations The general objective of this study is to find out the determinants of bank prof- itability in the Ethiopian commercial banks. A panel data of ten years from the sampled nine commercial banks were used to achieve the specified objectives and answer the hypothesized statements. Table 4. Regression output Table 3. Correlation index between explanatory variables Source: own competition, 2018. Model specification Tests Random effect versus Pooled OLS (Breusch and Pagan LM test) The pooled OLS is a pooled linear regression without fixed and/or random effects. It assumes a constant intercept and slopes regardless of group and time period. Regression Results and interpretations The general objective of this study is to find out the determinants of bank profitability in the Ethiopian commercial banks. A panel data of ten years from the sampled nine commercial banks were used to achieve the specified objectives and answer the hypothesized statements. Table 4. Regression output Source: own competition, 2018. Regression output The regression model is set as follows; BS 1.0000 BS BS -0.6976 0.0196 0.0655 0.1931 -0.3396 0.6970 -0.4573 LOANDEP 0.2721 0.2563 -0.1229 0.1666 0.1634 -0.4815 1.0000 OWN -0.4293 -0.0613 -0.1037 -0.0000 -0.0000 1.0000 GDP 0.1623 -0.1688 -0.1816 -0.1881 1.0000 HHI_TA 0.0980 -0.0178 0.0577 1.0000 Bmix -0.0906 0.0120 1.0000 GNexOpin -0.1844 1.0000 capta 1.0000 capta GNexOpin Bmix HHI_TA GDP OWN LOANDEP _cons -.0228835 .027418 -0.83 0.406 -.0774367 .0316697 BS .0035123 .0017717 1.98 0.051 -.0000128 .0070374 LOANDEP .0213929 .0089832 2.38 0.020 .0035192 .0392666 OWN -.0095011 .0040068 -2.37 0.020 -.0174734 -.0015288 GDP .0010893 .0010112 1.08 0.285 -.0009227 .0031013 HHI_TA .0029155 .0342972 0.09 0.932 -.0653252 .0711562 Bmix .0488447 .0115105 4.24 0.000 .0259424 .0717471 GNexOpin -.0013142 .0007116 -1.85 0.068 -.0027301 .0001017 capta -.089917 .044769 -2.01 0.048 -.1789932 -.0008408 ROA Coef. Std. Err. t P>|t| [95% Conf. Interval] Robust Root MSE = .00876 R-squared = 0.5147 Prob > F = 0.0000 F( 8, 81) = 5.88 Linear regression Number of obs = 90 S o u r c e : own competition, 2018. Regression output The regression model is set as follows. ROA = β0 + (β1) capta + (β2)Gexopin + (β3) Bmix + (β4) HHI_TA + (β5) Loandep + (β6) Bs+ (β7) Own+ (β8) GDP+ e (2) Muktar Abdela Shifa, Kenenisa Lemmi Debela, Endalew Gutu Tarfa198 The regression output implies that all bank specific determinants, busi- ness mix, loan to deposit ratio and banks size have a significant positive im- pact, whereas capital to total asset and general expense to total operating in- come have negative impact on ROA. In addition from the external determinants bank concentration and GDP growth rates have a positive insignificant impact, whereas ownership by the Government has a significant negative impact on ROA of commercial banks in Ethiopia. GDP is one among the macroeconomic factors that determine the profitability of commercial banks.  Conclusion The general objective of the study is to analyze the determinants of the prof- itability of commercial banks in Ethiopia. To achieve this goal internal deter- minants; business mix indicators, risk aversion index, management efficiency, liquidity risk, bank size, and external determinants; ownership, market con- centration, and GDP, are regressed against return on asset. A panel data of ten years from the sampled nine banks were used to come up with findings. The study results indicate that internal determinants are more important and strongly determine the banks’ profitability than externals variables. Thus Business mix indicators, risk aversion index, management efficiency, liquidi- ty risk and bank size has a significant effect on the return on asset, whereas except ownership other external determinants, i.e. market concentration and GDP has no significant relationship to determine return on asset of Ethiopian commercial banks. Recommendations Based on the above findings the following recommendations are drawn. ■ Since capital financing is found relatively costly than debt financing commercial banks in Ethiopia should emphasize more on mobilizing cu- stomer deposits than issuing equity. Also they have to render as much as loans from the mobilized deposit in order to utilize generated customer deposits. But due care have to be taken on both (deposit and loan) sides for optimal limits so as to balance their risk taking capabilities. dEtErminants of thE ProfitaBility of CommErCial Banks in EthioPia 199 ■ It is recommended for Ethiopian commercial banks to expand the exi- sting, and bring new innovative value added services which generates additional business mixes beside their normal operation. ■ It is advisable for Ethiopian commercial banks to expand in size. Becau- se, as the size of the banks increases their profitability also increases. Currently national bank of Ethiopia also inf luencing existing private banks to expand their capital and branches. ■ Managers should focus on minimization and efficient utilization of gene- ral expenses in order to generate as much operating income and boost the profitability of commercial banks in Ethiopia.  References Abebaw, K., & Kapur, D. (2011). What drives the performance of commercial banks in Ethiopia? 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