EFFECT OF LOAN PORTFOLIOS’ ON FINANCIAL PROFITABILITY OF COMMERCIAL BANKS IN ETHIOPI PANEL ANALYSES

Abstract

Banks play very significant role in the economies of the nation. The well-being of the economy is highly related to the soundness of its banking system. Loans comprise the single largest asset for commercial banks. The purpose of this study is to investigate the effect of loan portfolio on thefinancial profitability of commercial banks in Ethiopia. To achieve this objective explanatory research design with a quantitative approach was used. The study fully employed strongly balanced panel data from the period 2011-2020.Collocated data from 12 commercial banks audited financial statement purposively and by using Eviews-9 software packages analyzed through panel data regression analysis methods. The study employed a random-effect model as confirmed by the Hausman test. The study found that loan portfolio growth (LPG) and loan portfolio profitability (LPP) have statistically significant and a positive effect on commercial banks‘ financial profitability measured by ROA, ROE and NIM. Whereas, loan portfolio operational efficiency (LPOE) and loan portfolio asset quality (LPAQ) has a positive and statistically insignificant effect on Commercial banks‘ financial performance. That is LPAQ, LPG, LPOE and LPP are jointly explaining 58.35%, 65.46% and 53.4% of the change in ROA ROE and NIM respectively The researcher recommended that to increase loan portfolio asset quality (LPAQ) the bank has to revise and the fill gap of Credit Policy & Procedures within a short period of time and also to establish strong follow up mechanism to insure strict adherence to the Policy and Procedure.