Contabilidade e Marketing

The Determinants of Financial Stability of Commercial Banks: Empirical Evidence from Ethiopia

Abstract

Tilahun Simegnew Dress*

This study was conducted to investigate the determinants of commercial banks’ financial stability in Ethiopia for ten consecutive years (2009-2018). The target population of this study was the total number of commercial banks in Ethiopia, of which one is a state-owned bank and the rest are private banks. Data were collected from the audited financial statements of nine sample commercial banks selected by using purposive sampling. The balanced panel data and quantitative research approach were used for data analysis. Results are estimated by using multiple regression models. The empirical results revealed that there is a statistically significant and positive relationship between the financial stability of banks and bank size, capital adequacy ratio, and liquidity. On the other hand, operating cost was found to have a statistically significant and negative relationship with the financial stability of banks. The study also revealed that inflation had a negative and statistically insignificant relationship with the financial stability of banks. Finally, the deposit interest rate was found to have a positive and statistically insignificant relationship with the financial stability of commercial banks in Ethiopia. Therefore, this study recommended that banks, investors, regulators, and policymakers should give more attention to bank size, capital adequacy ratio, liquidity, and operating costs to maintain the financial stability of commercial banks in Ethiopia.