ASSESSMENT OF FACTORS AFFECTING PROFITABILITY OF

COMMERCIAL BANK OF ETHIOPIA

(IN CASE OF FITCHE TULU SELALE BRANCH)

HARAMBEE UNIVERSITY

FACULITY OF BUSSINESS AND ECONOMICS

RESEARCH PAPER SUMMITED INPARTIAL FULFILMENT OF THE

REQUIREMENT OFBACHLOROF ART (BA) DEGREE IN BUSSINESS
ADMINISTRSTION.

GROUP MEMBERS: - ID NO.

1. FIKADU TADESSE NAGI 4004

2. NIGUSE MAMO BERIHE 4013

3. SHUMI SHIFERA KUMSA 4031

ADVISOR: -

JULY, 2021

FITCHE, ETHIOPIA
 TABLE OF CONTENT

Content
page
APPROVED BY BOARD OF EXAMINERS......................................................................................I
DECLARATION.................................................................................................................................II
ACKNOWLEDGMENT.....................................................................................................................III
TABLE OF CONTENT.............................................................................................................................IV
LIST OF TABLE.......................................................................................................................................VI
ACRONYMS............................................................................................................................................VII
ABSTRACT...............................................................................................................................................VIII
CHAPTER ONE..........................................................................................................................................1
INTRODUCTION.......................................................................................................................................1
1.1. Background of the study.......................................................................................................................1
1.2. Statement of the problem..............................................................................................................2
1.3. Research question..........................................................................................................................3
1.4 Objective of the study.....................................................................................................................3
1.4.1 General objective........................................................................................................................3
1.4.2 Specific objectives......................................................................................................................3
1.6 Scope of the study..........................................................................................................................4
1.7 Limitation of the study.............................................................................................................4
1.8. Delimitation of the study...............................................................................................................4
1.9. Organization of the study..............................................................................................................5
CHAPTER TWO.........................................................................................................................................7
RELATED LITERATURE REVIEW.........................................................................................................7
2.1. Theoretical review.........................................................................................................................7
The role of bank’s................................................................................................................................8
A. Theories of bank profitability.........................................................................................................8
B. Balanced portfolio theory................................................................................................................9
2.2 Functions and services of Commercial banks.................................................................................9
2.2.1 Agency services........................................................................................................................10
2.2.2 General usability services.........................................................................................................10
2.3Mechanism of credit dealing.........................................................................................................10

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 2.4 Market competition and the challenges ahead.............................................................................10
2.5 How is profit measured?..............................................................................................................11
2.6. Profitability ratio.........................................................................................................................12
2.6.1 Gross profit margin...................................................................................................................13
2.6.2 Profit margin.............................................................................................................................13
2.7 Return on Investment..................................................................................................................13
2.7.1 Return on Equity ratio...............................................................................................................13
2.7.2 Operating Income ratio.............................................................................................................14
2.8 Profit planning..............................................................................................................................14
2.9 Profit maximization......................................................................................................................15
2.9.1 Objective of Profit maximization..............................................................................................16
2.10. Empirical review.......................................................................................................................17
CHAPTER THREE...................................................................................................................................19
RESEARCH DESIGN AND METHODOLOGY......................................................................................19
3.1. Research design...........................................................................................................................19
3.3. Source of data and data collection instrument.............................................................................19
3.4. Population and sampling techniques...........................................................................................19
3.5. Method of data analysis...............................................................................................................19
4.1 Back ground information of the respondents................................................................................20
Table 4.2 Analysis of the type of deposit bank accepts from customer..............................................22
Table 4.3 Analysis of banks revenue from money transfer, safe custody and other services..............23
Table:-4.4 Analysis of interest rate from type of loan........................................................................24
Table:- 4.5 Analysis of repayment of bank its depositors except time deposit...................................24
Table:- 4.6 analysis of bank doesn’t repay money to the depositors........................................................25
Table:- 4.7 Analysis of the bank collect amount of loan...........................................................................26
Table:- 4.11 Analysis effects of the competition on market share and profitability..................................28
Table:-4.12This analysis is banks awareness about profitability...............................................................29
SUMMERY, CONCLUSION AND RECCOMENDATION....................................................................30
5.1......................................................................................................................................................30
5.2. Conclusion..................................................................................................................................30
5.3 Recommendation.........................................................................................................................31
References.................................................................................................................................................32
APPENDEX.......................................................................................................................................33

II
ACRONYMS
CBE:-Commercial bank of Ethiopia

CBITDA:-Companies before interest tax and depreciation and amortization

EBIT:-Earnings before interest and tax

EBDIT:-Earnings before depreciation interest and tax

GAAP: - Generally accepted accounting principles

GDP:-Gross domestic product

NI: - Net income

NOPAT:-Net operating profit after tax

NPL: - Non-performing loan

PAT:-Profit after tax

PBT: - Profit before tax

III
 CHAPTER ONE

INTRODUCTION

1.1. Background of the study

Profit is a financial benefit that is realized when the amount of revenue gained from a business
activity exceeds the expense, cost and taxes need to sustain the activity. Any profit that is gained
goes to the business owners, who may or may not decide to spend it on the business. Profit is the
money a business makes after accounting for all the expenses. Regardless of whether the
business is running lemonade stand or public traded multinational company, consistently earning
profit is every company’s goal (Vo Mises, 1951).

Banks mobilize, allocate and invest the greatest part of the economic agent savings. Accordingly,
their performance has substantial consequences on capital allocation, firm expansion, industrial
growth and economic development. Therefore efficiency and profitability of banks of interest not
just at the individual bank level, but also important at a broader macroeconomic level (Aremu
and Mejab, 2013).

Profitability of banks and other financial institution is affected by different factors such as,
lending policy, loan advancing procedure and practice customer management, interest rate
factors, performance of employees, competitors action, employees training, supervision over the
employees. In order to eradicate such factors that can affect the profitability of the bank, the bank
must give its care and attention on the overall activities and performance of both internal and
external environment. (Athan, 2006)

Strong and hard work the bank can minimize and avoid these factors by making them sound in
the operation. So that the banks must be always be aware of the things or factors those are going
to affect the profitability to the normal and profitability of operation. The higher the banks give
focus on the future outcome of the current activities, the most favorable and optimum profitable
the bank could be and vice versa. If the bank is working hard the profitability is obvious.

The better profitability of the banks depending on the activities and performance do by the bank
particularly on the assessment and investigation of the bank to find out the optimum solution.

1
Therefore, all banks must be aware on the factors affecting the profitability, growth, expansion
and sustainability. The negligence and awareness problem causes total fall down of not only the
bank but also all financial institutions (Ibid, 2006).

In Ethiopia, commercial banks play an important primary role as financial intermediaries in the
economic growth process, channeling funds from savers to borrowers for investment. As
financial intermediaries, banks play an important role in the operation of an economy. In such
away, commercial banks are key providers of funds and their stability is of paramount
importance to the financial system. As such an understanding of determinants of their
profitability and the derivers of bank profitability for that matter is essential and crucial to the
stability of economy (Aburime, 2008).

In Ethiopia as to the knowledge of the researcher there were few studies which related with this
title these are,SoriTefera(2005) study suggestion for improving profitability of Commercial bank
of Ethiopia, Ketema(2006) study the relationship between ownership structure and profitability
of Commercial bank of Ethiopia, Askshaya Kumar(2009) study financial determinants of bank
profitability on Commercial bank of Ethiopia. The weakness of the above researcher is all of
them not focus on the basic factor that affects the bank profitability.

Therefore, this study will be aim to assess the factors affecting the profitability of Commercial
Bank of Ethiopia (CBE), specifically the emergence of new potential competitors in the market
in fiche Tulu selale branch.

1.2. Statement of the problem

The current economic crisis has highlighted that a well-functioning financial system is
significantly important for economic growth. The financial system enables an economy to be
more productive as it allows investors with few resources to use saving from those with few
prospects of investing. In this context it is crucial to know what drives bank profitability. Higher
profitability not only allows banks to generate funds to grant more credit to the economy, but
also important for regulators as it guarantees more flexible capital ratios, even in a riskier
business environment. In addition, bank profitability must also lead to fair return for its
shareholders. There are so many factors that will affect profitability of the banks, financial
institution and business enterprises. Identifying those factors has great significance for the

2
successful operation the organization, because these factors were a means of measuring the
weakness and strengthens and to realize the changing business environment. (Gelos, 2006)

The main factors that affect profitability of the banks are highly related to the emergence of new
potential competitors in the market. In addition to this efficiency of banking services to
customers like money transfer, loan facilities, deposit services in comparison to other
competitors are the other factors (Hasichim, 2007).

Therefore, this study will seek to fill the gap which is not fulfill factors affect bank’s profit
before and recent time, so by providing full information above the factors that affect profitability
by examining the untouched one before done at the same issue, and examining factors affecting
profitability of commercial bank of Ethiopia in Fiche Tulu selale branch.

1.3. Research question

In this study I will attempt to find out answers for the following questions:

1. What are the problems in the bank relation with profit?

2. Is the bank well aware of those factors affecting its profitability?
3. Is the bank giving services needed and contribute for the profitability?

4. What are the main factors affecting the profitability of the bank?

1.4 Objective of the study

1.4.1 General objective
The general objective of this study will be to assess factors affecting the profitability of
commercial bank of Ethiopia, fitche Tulu selale branch

1.4.2 Specific objectives

The specific objectives of this study will be:-

 To identify the problems aroused in the bank in relation with profit.

 To investigate whether the bank is well aware of those factors affects its profitability.
 To evaluate whether the bank gives services needed and contribute for the profitability.
 To examine the main factors affecting the profitability of the bank.

3
1.5 Significance of the study

The significance of this study will benefit the researcher to improve deep knowledge, skills, and
experience on the factors that may affect the profitability of the bank. This study also will have
significant contribution for other researchers who conduct the further study on the factors
affecting profitability of commercial bank of Ethiopia in any branch. Furthermore, the
significance of the study was the following. It enables policy makers and management body of
the commercial banks to adjust the bank management system and mechanisms. Suggest or
propose solution for identified problem based on the gathered information. It will provide
information to managers about the customers feeling or preference towards the bank services. It
also creates awareness for customers, managers and others.

1.6 Scope of the study

The conceptual border of this study will focuses on the assessment of those factors affecting the
profitability of commercial bank of Ethiopia, where as the geographical limit of the study will be
in Fiche Tulu Selale.

1.7 Limitation of the study

In conducting this paper will face the following limitation:-
 Unwillingness of the respondents in providing me with the relevant data and
information.
 Unwillingness of the respondents to answer the open-ended questionnaires.
 Lack of experience on conducting research on the side of researcher.
 Lack of sufficient time to collect data.
 Cost limitation

1.9. Organization of the study

This study has five chapters. The first chapter deal with introduction including back ground of
the study, statement of the problem, objectives of the study, significance of the study, scope of
the study, limitation of the study, and organization of the study. The second chapter related
review literature, the third chapter deals with research methodology, The fourth deal with chapter
data analysis and interpretation, the fifth chapter deal with summer, Conclusion and
recommendation.

4
 CHAPTER TWO

RELATED LITERATURE REVIEW

2.1. Theoretical review

The measurement of profit is one of the difficult problems faced by the accounting professions.
Accountant’s concept of profit differs from that of the economists. The figure of accounting
profit is the result of the application of generally accepted accounting principles (GAAP). The
accountant has to use his judgment, which at times is based on arbitrary assumptions for
measured profit. The recognition of revenue and expenses during the accounting period poses a
basic measurement problem. Most firms use accrual concept to allocate receipts and
expenditures to accounting periods as revenue and expenses. For example, a transaction is
treated as sale and recorded as revenue when title to goods is transferred to the buyer,
irrespective of the period in which cash is received. Similarly expense is recognized is the period
in which it is incurred, not when cash is paid.

The accounting profit is also distorted because of the optional ways of treating depreciation,
research and development expenditure, good would and patents and inventory valuation. The
price level changes further complicate the measurement of profit because of inflation the firm.
During inflation profits are earned on inventories held by the firm and depreciation allowance
based on historical cost fails to maintain the firm’s earned power.

In economic sense, profit would mean net increase in the wealth, visitors, cash flow plus change
is the value of the firm’s assets. This definition incorporates the time dimension and therefore,
implies the discounted definition of profit is based on accrual principle and includes non-cash
items. Even if we assume that all items of revenue and expense are on cash basis still these
would be difference b/n accounting profit and cash profit; the accountant charges depreciation,
which is a non-cash items, to compute accounting profit. Thus, the operating cash flow (i.e. cash
from operations) or cash profit can be found out by adding depreciation to the accounting profit.
The total cash flow of the firm however is also affected by the balance sheet changes.

5
This section reviews the basic theoretical issues related to banks and bank profitability and its
determinants. It presents the bank’s profitability theories and factors influencing bank
profitability.

The role of bank’s

This paragraph discusses the role of banks in the economy and examines the question, why bank
exist. At first sight the answer to this question was very intuitive and simple, banks act as
intermediary between those who are in need for money and those who have excess of money.
Looking more closely to this question there could be a more detailed explanation namely; entities
can borrow and save directly through their capital market. Furthermore capital markets suffer
from the information asymmetry and the agency problem. The agency problem refers to the
dissimilar incentives of borrowers and savers, in a broader context; it refers to the dissimilar
incentives of principles and agents.

Another important aspect of banking is the function of maturity transformation. Banks receive
short term savings from depositors and transform those saving in to long term loans to
borrowers.

A. Theories of bank profitability

Studies on the performance of banks started in the late 1970s/1980s with the application of two
industrial organizations modal ; the market power and efficiency structure theories and the
balanced portfolio theory has also added greater insight in to the study of bank profitability.
Each of the mentioned theories and other related to bank profitability and its determinants are
discussed in detail in this particular as follows:(Athanasoglu et al,2006).

The performance of bank was influenced by the market structure of the industry. There are two
distinct approaches within the market power theory, the structure conduct performance (SC P)
and the relative market power (RMP) hypothesis. According to the SCP approach, the level of
concentration in the banking market gives rise to potential market power by banks, which may
raise their profitability. In the RMP approach banks profitability is influenced by market share. It
assumes that only large banks with differentiated products can influence prices and increase
profits.

6
A The Efficiency Theory

The efficiency hypothesis, on other hand posit that bank earn high profit, because they are more
efficient than others. There are also two distinct approaches within the efficiency, the X-
efficiency, and scale efficiency hypothesis. According to the X-efficiency approaches more
efficient firms are more profitable because of their lower costs. The scale approach emphasizes
an economy of scale rather than differences in management of production technology.
(Athanasoglu et al 2006).

B. Balanced portfolio theory

The portfolio theory approach is the most relevant and places an important role in the bank
performance. According to the portfolio balance model of asset diversification the optimum
holding of each asset in a wealth holder. Portfolio is a function policy decisions of determined by
a number of factors, such as the vector of rates of return on all assets held in portfolio, a vector of
risks associated with it.

2.2 Functions and services of Commercial banks

The main function of commercial banks are borrowing and lending of money. They borrow
money by taking all kinds of deposits. Deposits may be received on current account where by
the banker incurs the obligators of paying tender after expire of a fixed period, or on deposit
account where by the banker under takes to pay the customer an agreed rate of him an agreed
period of notice for withdrawals. Thus, a commercial banker whether it be through current
account society. Then be provides this money to those who are or by discounting bills of
exchange or promissory notes. Thus a primary function or a commercial banker is that of banker
and a dealer in money to those who are in need of it by granting over draft or fixed loans or by
discounting bills of exchange or promissory notes of banker and dealer in money. By discharging
this function efficiently, a commercial bank renders very variable service to the community by
increasing the productive capacity of the country and there by accelerating the pace of economic
development.

Thus we have seen that a banker receives deposits which he has to repay according to his
promises and makes them available to those people who are really in need of them. (Shekhar and
Shehar 18th edition).

7
2.2.1 Agency services
Most of the commercial banks have an executor and trustee department; some many have
affiliated companies to deal with this branch of their business they aim is to provide, therefore, a
complete range of trustily executor or advisory services for a small change. The business of
banks acting as trustees, administrator, etc…, has continuously expanded with considerable use
fullness of their customers.

Private companies wishing to set up pension funds may appoint a bank as custodian trustee and
investment adviser, while retaining the administration of the scheme in the hands of the
management of the fund.

Most banks will undertake on behalf of these customers the preparation of income tax returns
and claims for the recovery of overpaid tax.

2.2.2 General usability services

These services are those in which the banker’s position is not that an agent for his customer they
include the issue of credit instruments like letter of credit and travelers’ check, the acceptance of
bills of exchange, the safe custody of valuables and documents, the transaction of foreign
exchange business, acting as referred as to the responsibility and financial standing of customers
and providing specialized advisory service to customers.

By selling drafts or orders and by issuing letter of credit circular notes, traveler’scheque, etc… a
commercial banker is discharging a very important function.

2.3Mechanism of credit dealing

Banks always try to minimize their holding of idle cash to the lowest extent possible. In their
attempt to achieve this end, they unwittingly increase the total amount of money in circulation in
the community. It does not mean that they increase the total amount of legal tender currency.

2.4 Market competition and the challenges ahead

It is clear and being increasingly realized by many bankers that banking is no more a deposit
taking and money lending institution, making profits on the deferential, not is it an institution
which could be run by bankers whose only qualifications were high integrity, intuitive
shrewdness, certain degree of impassivity, but not necessarily high intellect. The banking
industry is an increasingly competitive environment would face new challenges and support
unities.

8
It is time for them now to be proactive in their approach and to anticipate the new demands on
their skills that will be emerging and to prepare for the same through appropriate adjustments in
their organizational structure and method of operations and procedures in an environment of
operational flexibility and internal autonomy.

As competition and diversification exposes banks to new risks, sound bank management
becomes a pre-condition in the new area of financing liberalization. Thus there arise a need for
building strong management which is responsive to change policy reform in the finical sector can
be introduced on a durable basis only through concrete efforts, to strengthen institutional frame
work in which banks operate and develop the necessary know how and human capital. (Michael
E. Baker, 1998)

Banks do need a considerable degree of autonomy banks do need a considerable degree of

autonomy so as to be able to clearly define this operating role and strategy and perform their
banking business in a professional manner. Autonomy must also extend to the banks policies
relating to lending, financial management, and personnel.

2.5 How is profit measured?

Profit can be measured in various ways. Gross profit /GP/ is the difference between sales and the
manufacturing cost of goods sold. A number of companies in India define gross profit
differently. They define it was earnings profit before depreciation, interest and taxes /PBDIT or
EBDIT/.

A number of multinational companies interests tax and or earnings measure as earnings before
interest’s tax and depreciation and amortization or CBITDA. The most common measure of
profit is profit after tax /PAT/, or net income (NI), which is a result of the impact of all factors on
the firm’s earnings. Taxes are not controllable by management. To separate the influence of
taxes, therefore, profit before taxes (PBT) may be computed. If the firms profit has to be
examined from the point of view of all investors /lenders and owners/ the appropriate measure of
profit is operating profit, operating profit is equivalent of earnings before interest and taxes
(EBIT). This measure of profit shows earning arising directly from the commercial operations of
the business without the effect of financing. The concept of EBIT may be broadened to include
non-operating income is they exist. On an after tax basis, profit to investors is equal to EBIT (1-

9
T), where T is the corporate tax rate. This profit measure is called net operating profit after tax or
NOPAT.

As profitability measurement is the guide to effective management accountants will frequently

be expected to produce statement of problem to measure profitability.

There are six measurements being as follows:-

1. Comparison of total or unit profit

2. Percentage profit related to sale
3. Percentage profit related to time factor
4. Discounted cash flow
5. Profit related to time factor
6. Payback period.
Profitability is important when budgeting the level of activity at which the money factoring unit
is to be operated the ratio of profit to amount of capital employed should be uncertain a share
holder in the company or owner of a business can reasonable except return capital invested for
two basic reason.

1. Payment for the use of other capital

2. Payment for the risk takers in investing his capital.
Creditors will stay away from companied with profitability since the amount used to them may
not be paid absolute collect profit by itself has the significance unless it is related to its source
same major ratios that measure operating result are summarized as follows.

2.6. Profitability ratio

A company should earn profits to service and grow over a long period of time. Profits are
essential, but it would be wrong to assume that even action initiated by management of a
company should be aimed at maximizing profit, irrespective of concerns for customers,
employees, suppliers or social consequences. It is unfortunate that the word “profit” is looked
upon as a term of abuse since some firms always want to maximize profits at the cost of
employees, customers and society.Profit is different between revenue and expenses over a period
of time (usually one year), profit is the ultimate “output” of a company and it will have no future
it if fails to make sufficient profit. Therefore, the financial manager should continuously evaluate
the efficiency of the company is terms of profits. The profitability ratios are calculated to

10
measure the operating efficiency of the company. Besides management of the company, creditors
and owners are also interested in the profitability of the firm. Creditors want to get interest and
repayment of principal regularly owners want to get a required rate of return on their investment.
This is possible only when the company earns enough profits.

Generally, two major types of profitability ratio are calculated:-

 Profitability in relation to solutions

 Profitability in relation to investment

2.6.1 Gross profit margin

The gross profit margin the percentage of each birr left over of business has paid for its grades
the highest he gross profit earned the better profit equals net sales less cost of goods sold.

2.6.2 Profit margin

The ratio of net income for net sale is called the profit margin it indicate the profit generated
revenue and is an important measures of operating performance. It provides clause and
companies preparing cost structure and production.

Profit Margin = Net Income

Net Sales

2.7 Return on Investment

Return on investment shown the extent to which earning achieved on the investment made is the
business. There are basically two ratios that evaluate return on investment one is return an asset
directs the efficiency which were management has its available resource to generate income
return as asset can be raised by increasing other the profit margin or the asset turn over. However
profit margin many industry since it subject to sales cost control and pricing.

2.7.1 Return on Equity ratio

Measurement to the profit earned by the firm through the use of capital supplied by stock holder.

Return on equity ratios = Net income

Average equity

11
2.7.2 Operating Income ratio
Measurement of the profitability and business operation in relation to sales here expense.
Revenue gains and loss as that are unrelated to used operation are excluded.

Operating income ratio = Operating ratio

Net sales

The net profit percentage sale = Net income

Net sales

Profit has been normally regarded as the wages paid to the entrepreneur as the rent paid to the
employees specialist knowledge by the entrepreneurs as the interest on the entrepreneur capital
as it compares for risk taking as payment for management skill and as surplus expropriated by
capitalist from worked profit is the amount of money a company has left over from the sale of its
product it has paid for all the expense of the production. This expenses includes it has paid for all
the expense of production goods and services were saving price is greater than cost of producing
them. Thus search for profits is also the search use of countries labor and raw materials that will
satisfy consumer most completely some business execute constantly lower price to captures sales
and profit from these all interest taxes and changes against the gross profit have been paid profit
is amount of money of company has left over from the sale of production. These expenses of
production include loss of raw materials, workers and advertisement service charged and etc.

2.8 Profit planning

The function of the financial manager may be broadened to include profit planning function.
Profit planning refers to the operating decisions in the areas of pricing costs, volume of output
and the firm’s selection of product lines.

Profit planning is, therefore, a prerequisite for optimizing investment and financial decision. The
cost of structure of the firms i.e. the mix of fixed and variable costs has a significant influence on
a firm’s profitability, fixed costs remains constant while variable costs change in direct
proportion to volume changes because of the fixed costs, profits fluctuate at a higher degree than
the fluctuations in sales. There is a charge in profits due to charge as operating leverage. Profit
planning helps to anticipate the relationship between volume, costs and profits and develop
action plans to face unexpected surprises.

12
2.9 Profit maximization
Firm’s producing goods and services may fluctuation is a market economy or in a government
controlled economy. In a market economic, prices of goods and services are determined in
competitive markets; firms in the market economy are expected to produce goods and services
designed by society as efficiently as possible.

Price system is the most important organs of a market economy indicated was goods and services
society wants good of services is great demand command higher prices.

This return is higher profit for firms more of such goods and services are produced higher profit
opportunities attract other firms to produce such goods and services. Ultimately, with
intensifying competition an equilibrium price is reaches at which demand and supply match. In
the case of goods and services, which are not required by society, their prices and profits fail.
Producers drop such goods and services in favor of more profit opportunity. Price system directs
managerial efforts towards more profitable goods at services. Price is determined by the demand
and supply condition as well as the competitive forces and they guide the allocation of resource
for various productive activities.

A legitimate question may be raised would the price system is a free market economy serve the
interest of the society; Aden Smith has given the answer many years ago. According to him, by
directing industry in such a manner as its product may be of greater value intends only his own
gain, and he is in this, as in many other cases, lend by an invisible hand to promote and end
which was not part of his intention. Pursuing his own interest he frequently promotes that of
society more effectively than he really intends to promote it.

Following Smith’s logic it is generally held by economists that under the condition of free
competition businessman pursuing their own self-interest also serve the interest of society. It’s
also assumed that were individual firms perusing the interest of maximizing profits. Society’s
resource is efficiently utilized.

In the economy theory, the behavior of a firm is analyzed in terms of profit maximization. Profit
maximization implies that a firm either produces maximum output for a given amount of input or
uses minimum input for producing a given output. The underlying logic of profit maximization
causes the efficiency allocation of resource. Under the competitive market condition and profit is
considered as the most appropriate measure of a firm’s performance.

13
2.9.1 Objective of Profit maximization
The profit maximization assumes perfect completion and is the force of imperfect modern
market it cannot be a legitimate objective of the firm. It’s also argued that profit maximization as
a business objective developed in the early 19th century when the characteristics features of the
business structure were self-financing private properly and single entrepreneurship.

The only aim of the single owner than was to enhance his or her individual wealth and personal
power which could easily is satisfied by the profit maximization objective. The modern business
environment is characterized by limited liability and advice between management and owner
ship, shareholders and lenders today finances the business firm but it’s controlled and directed by
professional management. The other important stakeholder of the firm is customer, employee’s
government and society is practice the objective of those stakeholder or constituents of a firm
differ and may conflict with each other. The manager of the firm has the difficult task of
reconciling and balancing this conflict objective. In the new business environment, profit
maximization is regarded as unrealistic difficult, in appropriate and immoral.

It is also feared that profit maximization behavior is market economy may tend to produce good
and service that wasteful and unnecessary from the society’s point of view also. It might lead to
inequality of income and wealth, it is for this reason that governments tend to intervene in
business price system and therefore, the profit maximization principle may not work due
imperfections in practice.

Oligopolies and monopolies are quite common, phenomena of modern economics, firms
producing some good of service differ substantially in terms of technology, costs and capital in
view such conditions it is difficult to have a truly competitive price system and thus it is doubtful
if the profit maximization behavior will least the optimum social welfare. However it is not clear
that abandoning profit maximization as a decision criteria’s would solve the problem rather
government intervention may be sought to correct market imperfection and to promote
competition alone business firms.

A market economy, characterized by a high degree of competition would certainly entre efficient
production of goods and services desired by society in profit maximization operationally feasible
criteria’s. A part from the aforesaid objections, profit maximization fails to serve as an
operational criteria’s for maximizing the owners economic welfare. It fails to provide an

14
operationally feasible measure for ranking alternative course of action in terms of their economic
efficiency. It suffers from the following limitations.

- It is vague
- It ignores the timing of returns
- It ignores risk
(Sources financial management)

Determinants of profitability; an empirical study on commercial bank of Ethiopia is outcome of

many factors mentioned above in the study, and additional the researcher want to investigate to
solve unsolved problems in the studied organization. If the researcher studies compliance with
the accepted standards with respect to original and quality.

The results of this study shows the bank’s profitability removed those influenced factors before
the empirically suggested that, capital, labor productivity growth, inflation significantly affect
profitability. All the bank specific determinant variables statistically impact on bank profitability.

During the period under this study try to remove negative impact on banks profitability and to
encourage a positive impact like non-interest income and capitalization. Empirically suggested
that commercial bank of Ethiopia becomes more profitable than their competitors. They become
better capitalized banks, a relatively large share of deposits and more profitable.

2.10. Empirical review

As per Dietrich, A&Wanzenried,G.(2011),the coefficient on GDP per capita indicates that banks
in higher per capita income countries are more efficient in terms of attracting more deposits and
generating stronger cash flows than banks in low income countries. This should not be surprising
as countries with higher per capita income (i.e., more developed countries) tend to generate more
savings, and hence more deposits. The provision to total loans ratio is found to have a significant
negative impact on banks‟ return on assets. Though banks tend to be more profitable when they
are able to undertake more lending activities, yet due to the credit quality of lending portfolios
and the general practice in Macao, a higher level of provision is needed. Such a high level of
provisions against total loans in fact depresses banks‟ return on assets significantly. The negative
sign on bank size suggests that larger banks achieve a lower ROA than smaller ones. This shows
that the interbank market is competitive and efficient since banks with a large retail deposit-
taking network do not necessarily enjoy a cost advantage against other banks. Therefore, rather

15
than size, efficiency is more important in affecting bank profitability. Among the external
determinants, only the inflation rate shows the strongest impact on banks‟ return on assets. This
may imply that bank management may anticipate the rate of inflation and react accordingly.
Consequently, banks in Macao tend to be more profitable in inflationary environments. As for
the economic growth show no impact on bank profitability (Heffernan, S et al., 2008).

As per Rasiah,D.(2010),interestingly, however, deposit growth (DG) has a negative relationship

with both ROA and ROE; the relationship is not only consistent across different methods. The
results appear to indicate that while deposit financing may be an important determinant of
profitability, some institutions may have reached their optimum deposit–asset ratios and those
seeking to expand their deposit base assertively, with the intention of eventually improving
profitability, may have to do so at the cost of rising expenses and falling profitability in the
meantime. Moreover, institutions may not be able to convert high growth in deposits into high
income generating assets; due perhaps to lack of bankable projects (ADB, 2005).
.According to Santabárbara D et al. (2009) Loan loss provision ratio, Liquidity of assets ratio and
Overheads ratio have negative correlation. Whereas size has positive correlation confirms the
general accepted idea that bigger banks obtain better results.
Dietrich, A &Wanzenried,G.(2011)find that credit risk has a negative and insignificant effect on
profitability. This suggests that risk-averse shareholders target risk adjusted returns and see
larger earnings to compensate lower credit risk. The negative and insignificant coefficient of the
size variable gives support to the economies of scale market-power hypothesis. Larger banks
make efficiency gains that can be captured as lower earnings due to the fact that they do not
operate in very competitive way.
In particular, inflation has a positive effect on bank profits, which suggest that banks forecast
future changes in inflation correctly and promptly enough to adjust interest rates and
margins(ibid).

Therefore, this study will aim to assess the factors affecting the profitability of Commercial Bank
of Ethiopia (CBE), specifically the emergence of new potential competitors in the market.

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 CHAPTER THREE

RESEARCH DESIGN AND METHODOLOGY

3.1. Research design

The design of this study was descriptive type, because the research was deal with those factors
affecting the profitability of the bank by gathering data from different sources. I was use mixed
research approach which is qualitative and quantitative to collect, describe and analyze the data
to solve bank’s business problem. The reason for using quantitative approach is to address the
research question and design of study that involve collecting a quantitative method. The reason
for using qualitative is to address the research question and design for collecting and analyzing
the qualitative data using interpretation.

3.3. Source of data and data collection instrument

I was using both primary and secondary data sources to gather the required data. The primary
data will be collect through questionnaire. The questionnaire includes both close-ended and
open-ended questions, whereas secondary data will be gather from different sources such as
banks document, magazines, internet and previous researches done on the same issue.

3.4. Population and sampling techniques

From the total population of the 31 employees, I was selecting a sample to gather the relevant
data by using judgmental sampling technique. From this population, 18 persons would be take as
a sample. The reason for using this sampling technique is the data which is need to control the
problem can only obtained from those people. The other reason is that I believe the members to
be representative of the population.

3.5. Method of data analysis

After data will be collect and process using the basic data processing techniques such as; editing,
coding and classification, the data collect from both primary and secondary data sources will be
analyze using descriptive analysis and appropriate interpreting conclusion and recommendations
are forwarded based on the result. So the data was analyze and present by using tables, which
shows qualitative and quantitative data, to make data more suitable for interpretation .

17
 4. Time Schedule and Budget plan

4.1 Time schedule

No Activates Time periods / Months/
Feb March April May June July August
1. Title Selection XX
2. Literature review and Proposal XX XX XX
writing
3. Proposal submission XX
4. Data Collection XX XX
5. Data processing and analyzing XX XX
6. Report writing and presentation XX XX

4.2. Budget Plan

Quantity(Amount
No Materia Measureme Price/ Birr Total RE
l nt price MA
RK
1 Paper 1 dozen Dozen 480per dozen 480s Br
2 Pen 6 Number 10 birr/pen 60 Br
3 Print 40 x3 Page 5 birr/page 600 Br
4 Soft 50 Page 10 birr/page 500 Br
copy
5 CD 2 Number 10 birr/ CD 20 Br
6 Flesh 2 Number 350 x2 700 Br
Total 2360
Contingency 2360x10% 236
fee
Grand Total 2596.00

18
References
 Aburime, Tu (2008) banks profitability macroeconomic evidence from Nigeria
 Al-Haschim,( 2007) Determinants of commercial banks profitability in Sub-
Saharan Africa, IMF.
 Aremu and Mejab (2013) relation of bank and economy. University of Kuwait
Natal.
 Athanasoglou, P journal of international financial market, institution and money.
 Gelos,(2006) Determinants of banks profit performance and spreads
International Monetary fund Working paper in Latin America Western
Hemisphere

 Von Mises,L(1951) . Economic Analysis of banks profitand loss. Austrian

Economists Foundation for Economic education.
 Michael E.Baker,(1998).studies the competition and diversification of bank,
Baker College center district of Colombia United Studies.
 Levine (2000) study on positive impact banks profitability.
 Nzongang and Athemnkeng (2006)
 Perry, P (1992) Do Banks gain and loss from inflation, Journal of retail Banking.

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