YOM POST GRADUATE COLLEGE

DEPARTMENT OF DEVELOPMENT ECONOMICS

ECONOMIC IMPACT OF COVID-19 OUTBREAK ON BANK

INDUSTRIES; THE CASE OF SOME SELECTED
COMMERCIAL BANKS IN ETHIOPIA

A THESIS PAPER SUBMITTED TO YOM POSTGRADUATE COLLEGE

FOR THE PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR
THE AWARD OF MASTER OF SCIENCE DEGREE IN DEVELOPMENT

ECONOMICS

By: Derartu Ephrem

Advisor: Mulatie Chanie (Assistant Professor)

July, 2023

Addis Ababa, Ethiopia

 DECLARATION
I Derartu Ephrem, GSDRA/010/14A I.D. number, do hereby declare that this thesis paper
entitled “Economic impact of Covid-19 outbreak on bank industries; the case of some
selected commercial banks in Ethiopia” is my original work and that it has not been submitted
partially; or in full, by any other person for an award of degree in any other university/institution.

Submitted by: Full Name Derartu Ephrem Signature: ________ Date: __________

Approved by: This Thesis has been submitted for examination with my approval.

Name of Advisor Mulatie Chanie (Assistant Professor) Signature: ______________ Date:

_____________

I
 APPROVAL
The undersigned certify that they have read and hereby recommend to YOM Postgraduate
College to accept the thesis paper submitted by Derartu Ephrem and entitled “Economic
impact of Covid-19 outbreak on bank industries; the case of some selected commercial
banks in Ethiopia” in partial fulfilment of the requirements for the award of a Master’s Degree
in Development Economics.

Submitted by: Full Name Derartu Ephrem Signature ______________ Date ______________

Approved by: Name of Advisor Mulatie Chanie (Assistant Professor) Signature _________
Date ________

Name of Internal Examiner ________________________ Signature__________ Date_________

Name of External Examiner ________________________ Signature_________ Date_________

Name of Head of Department _______________________ Signature________ Date _________

II
 ACKNOWLEDGMENT
First and foremost, I would like to thank Omnipotent God, the Compassionate, the Most
Merciful and Source of Knowledge & amp; Wisdom, who bestowed upon me the health, the
power of communication and the audacity to accomplish this thesis. And I am heartily indebted
to his mother Saint Marry too. Second, I would like to sincerely thank my advisor Mulatie
Chanie (Assistant Professor) for his constructive comments, valuable suggestions and good
guidance, not only as an advisor for his care like as a big brother. I also would like to thank the
staff and management of National Bank of Ethiopia for providing me with financial statement of
sampled private commercial banks and macroeconomic data. I do not know how I can state for
all stakeholders and my staff members in my thesis proposal paper therefore; I would like to say
just thanks. Finally, I would like to thank God again for putting an amazing people in my life
like my all of you.

III
 ACRONYMS
ANN- Artificial Neural Network
ARDL- Autoregressive Distributed Lag
CARES- Coronavirus Aid, Relief and Economic Security
CBI- Central Bank Independence
CBs -Commercial Banks
COVID -Coronavirus Disease
ETB- Ethiopian Birr
EU- European Union
FPI- Financial performance Index
GDP- Gross Domestic Product
GFC- Global Financial Crisis
IC- Intellectual Capital
IMF- International Monetary Fund
MSEs- Micro and Small Enterprises
NBE -National Bank of Ethiopia
NIM- Net Interest Margin
NPL- Non-Performance Loan
OBS- Off-Balance Sheet
PER- Profit Earning Ratio
ROA- Return on Assets
ROE- Return on Equity
SARS- Severe Acute Respiratory Syndrome
WB- World Bank
WHO- World Health Organization

IV
 List of Tables and Figures

Table 4.1 Summary of the descriptive statistics ………………………………….……….…22

Table 4.2 Correlation among the dependent and independent variables ……………………24

Table 4.3 Shapiro Wilk statistics result to test Normality of BP………………….…………25

Table 4.4 Heteroscedasticity test output for BP……………………….………….…………26

Table 4.5 Pesaran CD test output for BP……………………….………….……………........27

Table 4.6 Regression results……………………….………….……………............................27

V
 List of Figures

Figure 1: Time series of ROA and Efficiency of some selected commercial banks …………30

Figure 2: Time series of BE, BCR, BD, and BC of some selected private commercial banks.30

VI
 Table of Contents
DECLARATION..........................................................................................................................................I

APPROVAL................................................................................................................................................II

ACKNOWLEDGMENT............................................................................................................................III

ACRONYMS.............................................................................................................................................IV

Table of Contents......................................................................................................................................VII

Abstract......................................................................................................................................................IX

CHAPTER ONE..........................................................................................................................................1

INTRODUCTION.......................................................................................................................................1

1.1. Background of the Study......................................................................................................................1

1.2. Statement of the Problem......................................................................................................................4

1.3. Objective of the Study..........................................................................................................................7

1.3.1. General Objective..............................................................................................................................7

1.3.2. Specific Objectives............................................................................................................................7

1.4. Scope of the Study................................................................................................................................7

1.5. Significance of the Study......................................................................................................................7

1.6. Organization of the Study.....................................................................................................................8

1.7 Limitation of the Study..........................................................................................................................8

CHAPTER TWO.........................................................................................................................................9

REVIEW OF RELATED LITERATURE...................................................................................................9

2.1. Theoretical Literature...........................................................................................................................9

2.1.1. Financial Sector and the Covid-19 pandemic.....................................................................................9

2.1.2. Profitability......................................................................................................................................11

2.2. Related Empirical Literature...............................................................................................................12

2.2.1. Global Banking Sector Studies During the COVID-19 Pandemic Period........................................12

2.2.2 Study of the Banking Sector in Ethiopia during the COVID-19 Pandemic Period............................14

2.3 Literature Gap......................................................................................................................................16

VII
2.4. Conceptual Frame work......................................................................................................................16

CHAPTER THREE...................................................................................................................................17

RESEARCH METHODOLOGY...............................................................................................................17

3.1. Research Methods...............................................................................................................................17

3.2. Research Design.................................................................................................................................17

3.2.1. Explanatory research........................................................................................................................17

3.3. Research Approach.............................................................................................................................17

3.3.1. Quantitative research.......................................................................................................................17

3.4. Sample and Sampling Techniques......................................................................................................18

3.5. Data source and Data Collection Technique.......................................................................................18

3.6. Methods of Data Analysis...................................................................................................................18

3.7. Model Specification, Variable Description and Hypothesis................................................................19

3.7.1 Model specification...........................................................................................................................19

3.8. Study Variables...................................................................................................................................20

3.8.1. Dependent variables.........................................................................................................................20

3.8.2. Independent variables......................................................................................................................21

CHAPTER FOUR.....................................................................................................................................25

DATA ANALYSIS AND DISCUSSION..................................................................................................25

4.1. Descriptive Statistics...........................................................................................................................25

4.2. Correlation Analysis............................................................................................................................26

4.3. Model Selection..................................................................................................................................27

4.3.1. Random Effect versus Fixed Effect Models.....................................................................................27

4.4. Diagnostic Test...................................................................................................................................28

4.4.1. Test for Average Value of the Error Term is Zero...........................................................................28

4.4.2. Normality Test.................................................................................................................................28

4.4.3. Heteroscedasticity Test....................................................................................................................29

4.4.4. Autocorrelation Test........................................................................................................................30

4.5. Results of the Random Effect Regression Model................................................................................30

VIII
4.6. Discussion of the Regression Results..................................................................................................32

4.7. Time Series Analysis to find out COVID 19 impact on each variable.................................................33

References.................................................................................................................................................38

IX
 Abstract
The objective of this study was to economic impact of covid-19 outbreak on bank industries on
selected commercial banks in Ethiopia. The populations of the study were 29 private commercial
banks in Ethiopia, but for the study purpose the researcher used sample of seven private
commercial banks. The data used in this study was secondary data which collected from NBE. In
order to achieve the stated objectives, statistical analyses were carried out using the following
methods: Firstly, descriptive statistics of the variables was made over the sampled period,
correlation analysis was made and hausman fixed-random specification test was employed to
select from the two models and accordingly, random effect model was selected and used. Finally,
CLRM assumptions and diagnostic test were held. The results of fixed effect regression model
analysis showed that bank equity had positive and statistically significant effect on banks
profitability while bank credit and efficiency had negative and insignificant effect on
profitability. Bank deposit had positive and significant effect on profitability measured by ROA.
Bank capital had positive and significant impact on profitability. Among the control variables
GDP had positive and statistically insignificant effect on bank profit. And Inflation had negative
and statically significant effect on bank profit. Finally, the researcher finds out the status of
variables those determine the banks’ performance of during COVID 19 pandemic and lockdown
of the global economic and social movement. Based on the findings the researcher recommends
banks and financial institutions to minimize their risk or down warding their business
performance they should have to take strategic tactics of services and product supplying way to
retain profit growth rate.

Keywords: Bank profit, performance, national bank of Ethiopia, private banks, bank profit
determinants.

X
 CHAPTER ONE

INTRODUCTION
1.1. Background of the Study
Coronavirus disease (COVID-19) is an infectious disease caused by the SARS-CoV-2 virus. Most
people infected with the virus will experience mild to moderate respiratory illness and recover
without requiring special treatment. However, some will become seriously ill and require medical
attention. Older people and those with underlying medical conditions like cardiovascular disease,
diabetes, chronic respiratory disease, or cancer are more likely to develop serious illness. Anyone
can get sick with COVID-19 and become seriously ill or die at any age. The best way to prevent and
slow down transmission is to be well informed about the disease and how the virus spreads. Protect
yourself and others from infection by staying at least 1 meter apart from others, wearing a properly
fitted mask, and washing your hands or using an alcohol-based rub frequently. Get vaccinated when
it’s your turn and follow local guidance (World Health Organization website).

The COVID-19 pandemic is predicted to have a significant negative effect on businesses across the
globe. The financial sector especially banks had a major role to play in the revival of businesses
through the provision of soft loans to these businesses that were having liquidity challenges as a
result of the pandemic (Alhassan Musah, Abigail Padi and Ibrahim Anyass Ahmed, 2022). The
ongoing pandemic crisis (COVID-19) offers a better quasi-natural experiment than the global
financial crisis (GFC) and prior crises to study bank performance in turbulent times (Miroslav
Mateev, Ahmad Sahyouni, and Turki Al Masaeid, 2022)

According to Beck & Keil, 2021; Elnahass, Trihn, & Li, 2021; Borri & Giorgio, 2021, the covid-19
pandemic that became a major global health crisis in almost all parts of the world affected various
areas such as healthcare delivery, international trade, financial markets, and banking systems in a
way never seen before in recent history. Based on the study of Borri & Giorgio, 2021; Berger,
Demirgüç- Kunt, Moshirian, & Saunders, 2022, the pandemic affected almost all economies to the
point that international organizations such as the World Bank and the International Monetary fund
argued that there was going to be about a 3.1% reduction in the growth of economies around the
world. They stated that there was going to be about an 8.2% drop in global trade volume as a result

1
of the pandemic. The pandemic resulted in lockdown in most parts of the world and the introduction
of social distancing rules that affected the way most businesses were conducted (Balboula &
Metewea, 2021; Kozak, 2021). The effect of the pandemic on the business environment was huge as
there was a disruption in the global supply chain which harmed businesses around the world
(Demirgüç-Kunt, Pedraza, & Ruiz-Ortega, 2021).

The Coronavirus disease has become a severe pandemic and poses many serious challenges at
national, regional and global levels. The consequences, even if they are difficult to calculate, are
expected to be enormous in view of the rapid spread of the COVID-19 and the drastic measures
taken by countries whatever their size worldwide. Even if African countries are relatively less
affected compared to other regions for now, the spillover effects from global developments or
broken supply chains may still lead to faltering economic activity. Indeed, the highly dependency of
African economies vis-à-vis foreign economies predicts a negative economic spinoff for the
continent, evaluated at an average loss of 1.5 points on economic growth 2020. Besides, it is
practically impossible for the continent to take an economic advantage of the wide spread of
COVID-19 in other parts of the world, due to its inability to transform its raw materials to respond to
the potential high demand of goods and services of the domestic and international markets. They
may act as an additional constraint on Africa’s productive transformation, by making trade in value
added more difficult. Regardless of the scenario whether optimistic or pessimistic, COVID-19 will
have a harmful socioeconomic effect on Africa. These measures presented a huge shock to the
business sector as most sectors began to African countries are already experiencing the direct effects
(morbidity and mortality) and indirect effects (economic activities-related) of COVID-19 and the
situation is expected to worsen under any scenario with the pandemic virus already affecting 43
countries on the continent. Many African governments and regional institutions are taking measures
to limit the effect of the pandemic on their economies have liquidity problems largely on account of
revenue shortfalls (WHO, 2020).

The overall impact of COVID-19 on the Ethiopian economy has been modest. The spread of the
COVID-19 pandemic in the country has also remained low unlike to the expectations. This study
highlights the policy and non-policy factors that contributed towards this. The COVID-19 pandemic
emerged when the country had started to face macroeconomic imbalances (high trade deficit, risk of
debt distress, high inflation and unemployment) and social unrest. In the 2019/20 fiscal year, the

2
Ethiopian GDP growth rate was predicted to decline between 2 to 10 percentage points depending on
the severity of the COVID-19 pandemic. The loss of employment was also forecasted to range from
0.75 million to 2.5 million jobs, again depending on different scenarios of the spread of Covid-19 in
the country. The GDP growth rate in 2019/20 was 6.1 per cent, showing a decline by about 3
percentage points from the earlier year (2018/19). The most negatively affected sectors were the
service and industry sectors whereas agriculture remained unaffected. In 2019/20, growth in the
service and industry sectors dropped by about half (from 11 per cent to 5.3 per cent) and 3
percentage points (from 12.6 per cent to 9.6 per cent), respectively, in comparison to the earlier year.
In contrast, growth in agriculture slightly increased from 3.8 per cent to 4.3 per cent during the same
period. Job losses also seem to be moderate. Reports also show that the highest job loss is observed
in the service (e.g., hospitality and trade) and construction sectors. The COVID-19 impact on
Ethiopia’s overall trade was not as it had been feared. The government has also encouraged
businesses to design innovative strategies to address the COVID-19 challenges and exploit emerging
opportunities. The Ethiopian Airlines is a good case in this regard. Like most carriers, it faced a huge
drop in revenue following its decision to discontinue more than 80 per cent of its global flights. But
it was able to withstand the pandemic better than many other carriers due its new strategy to
diversify its business by shifting its focus from passenger to cargo services. The government has also
encouraged manufacturers to engage in the production of essential medical supplies and equipment
to fight Covid-19 (Gebreeyus, 2022).

Economic stimulus policy aimed to help businesses that were struggling to repay their loans. Under
this policy, the central bank injected 15 billion ETB (or 0.45% of GDP) into private banks to allow
the banks to reschedule debt repayments and reduce interest for borrowers without incurring a loss.
The government also provided an additional 33 billion ETB to the Commercial Bank of Ethiopia and
1.5 billion ETB to farmers’ cooperatives to maintain the supply chain soon after the start of the
pandemic (Goshu et al., 2020). The Development Bank of Ethiopia established a special window to
quickly dispense loans to micro and small-scale enterprises (MSES) and the National Bank of
Ethiopia provided additional funds to microfinance institutions so that they could make them
available to borrowers. (Kassa Teshager and Tesfaye Chofana, 2021).

3
1.2. Statement of the Problem
The banking sector is supposed to play a critical role in the economies of many countries by
absorbing the shocks in the economy through the supply of the much-needed liquidity to support the
business sector (Beck & Keil, 2021; Demirgüç-Kunt et al., 2021; Borri & Giorgio, 2021; Elnahass et
al., 2021; Acharya & Steffen, 2020).

Investigate how the pandemic affected the banking industry and whether banks or corporations, or
banks with certain features, were affected differently by the shock. We examine the impact of
various policy actions on addressing bank stress as perceived by markets, in the aggregate as well as
across different banks, using financial sector policy responses and an event research technique. The
potential impact of these countercyclical lending policies on the stability of the banking systems in
the future and the extent to which they will be able to absorb this shock without weakening their
resilience due to their strengthened capital positions since the global financial crisis are crucial
policy questions. The COVID-19 shock had a considerably more severe and sustained negative
effect on banks than on the corporates as well as other non-bank financial institutions, revealing the
expectation than banks reveals the assumption that banks will at least partially absorb the shock to
the corporate sector. This expectation is on both the corporates and other non-bank financial entities.
The actions to enhance liquidity and help borrowers had the biggest positive effects on anomalous
bank returns. The announcement of borrower aid measures raised anomalous returns for larger banks
and state banks, but illiquid banks profited most from liquidity support. (Asli Demirguc-Kunt, 2020).

According to study in Ghana conducted by Lhassan Musa, Abigail Padi and Ibrahim Anyass Ahmed
(2022), based on the study measured bank profitability using return on assets and return on equity,
the positive coefficient between covid-19 pandemic and return on assets is statistically significant at
a 1% significance level which implies that covid-19 is a significant determinant of the increase in
return on assets among commercial banks. The correlation and panel regression analysis showed a
positive relationship between covid-19 pandemic and returned on equity. However, the positive
relationship between covid-19 pandemic and return on equity is not statistically significant, implying
that the covid-19 pandemic is not a significant predictor of the changes in return on equity among
commercial banks.

The impact of the COVID-19 pandemic on the banking industry's earnings in Uganda for the period
spanning Q1 2000 to Q1 2021 is the subject of another study conducted in Uganda by Lorna

4
Katusiime (2021). This study uses the autoregressive distributed lag (ARDL Bound) testing
approach to co-integration while controlling for bank specific and macroeconomic determinants of
bank profitability. Return on assets (ROA), return on equity (ROE), and net interest margin (NIM)
are three measures used to approximate bank profitability. According to the analysis, the COVID-19
epidemic only significantly lowers bank profitability over the long term.

According to a study done on 225, banks in 18 MENA countries, the efficiency and market power of
banks have a significant impact on bank performance. They also look into if there are any notable
differences between the two banking systems (Islamic and conventional) in terms of efficiency and
the consequences of market competition. According to their findings, conventional banks are more
profitable than Islamic banks due to efficiency and competitiveness. However, during the COVID-19
outbreak, the efficiency impact is merely moderately noticeable. Overall, our findings imply that
managing at a greater efficiency level improves financial stability while also increasing the bank's
willingness to take bigger risks. These results confirm the idea that efficient banks are more resilient
to financial crises on a global scale and highlight the significance of regulatory changes for banks
that increase efficiency in fending off the detrimental effects of the recent COVID-19 crisis.
(Miroslav Mateev, Ahmad Sahyouni and Turki Al Masaeid, 2022).

Several studies have been conducted on this area in developed and developing countries throughout
the world, but in our case only few papers have been done. And to the best of the papers’ knowledge
there are on this area only by Tesfaye Lelissa (2020) and MESAY ALEMAYEHU (2021) they have
contributed a lot to literature in this area.

The input-output methodology was used by Tesfaye (2020) to investigate the effects of the COVID-
19 epidemic on Ethiopia's private banking system and to inform interventions and policy responses.
It used ten years of aggregate private commercial bank historical data from 2010 to 2019 to study
patterns as well as investigate the effect of the pandemic on past essential success determinants. The
findings reveal that the pandemic has an impact on both the balance sheet and the income statement
of banks. The influence is masked in the current year due to a strong performance record prior to
COVID-19.

The other researcher explored that Coronavirus explosion significantly influenced Ethiopia's bank-
customer relationship. To overcome the uncertainty brought on by the COVID-19 outbreak, a bank
management must balance the intentions of liquidity, safety, and profitability in managing its

5
investment portfolio. Instead of sticking with fund-based income, Ethiopian banks should adopt a
new financial product distribution channel model, such as banc assurance, to diversify revenue
sources and credit and liquidity risks. By accepting short-term deposits, making medium-term and
long-term loans, and monitoring unintelligible loans through digitization, commercial banks must
quickly shift maturity and provide liquidity. Last but not least, the Ethiopian banking sector has to
expand the digitalization of their banking system to reduce the severity of profitability, liquidity, and
credit crisis by tapping into untapped markets and banking anywhere rather than just at banks.
(Chali, 2022).

According to the study conducted by (MESAY ALEMAYEHU, 2021) COVID-19 The COVID-19
epidemic has an impact on the primary commercial banking activities, such as loan collection and
disbursement, deposit processing, foreign currency generation, international trade services, interest
and other incomes of banking services. Commercial banks have implemented a variety of
operational methods to address the issue, such as loan rescheduling, providing working capital loans,
canceling service fees, and cutting interest rates for clients in highly impacted sectors. Finally, the
study recommended possible operational measures to be taken. In response to the pandemic, CBs
should reduce import-export-related fees, implement effective e-banking, raise the interest rate on
savings to encourage saving, provide advisory services to customers who are having trouble
recovering from the effects of the pandemic, and focus on generating foreign currency by promoting
export-oriented platforms and encouraging remittances, among other things.

The researcher believes that with the quick changes in technology, policies, product portfolio and
strategy variables as well as bank regulations those few researches are not enough to understand or
know the positive or negative effect of Covid-19 on profitability of some certain Ethiopian private
commercial banks; this is what motivates the researcher to undertake research on this area using
seven private commercial banks’ data in Ethiopia.

The researcher will use the dependent variables for the research is bank profitability which is
measured by return on assets and return on equity. The main independent variable is covid-19
pandemic as well as macroeconomic factors such as economic growth and interest rate. The
measurement of the variables and their definition as well as some control variables that were
sampled from previous studies as potential determinants of bank profitability are will be in chapter
three.

6
1.3. Objective of the Study

1.3.1. General Objective

The main objective of the study is to estimate the effect of COVID-19 on the Financial performance
of private commercial banks in Ethiopia.

1.3.2. Specific Objectives

 To examine the impact of COVID-19 pandemic on return on asset of some certain Ethiopian
private commercial banks.
 To examine the impact of COVID-19 on return on equity of some certain Ethiopian private
commercial banks.
 To find out the efficiencies of some selected banks during COVID-19.
 To find out the impact of COVID-19 on key banks’ asset determinants; BCR, BD and BC.

1.4. Scope of the Study

The study was limited to inspecting the impact of COVID-19 on profitability of private commercial
banks in Ethiopia. The researcher will include private commercial banks established in Ethiopia and
made the analysis using secondary source of data. The study will take in to account the profitability
of banks for the last 10 years that is from 2003 to 2023. As a result, the research included Ethiopian
private commercial which together account for 69% of market shares, and the numbers of bank will
be seven banks that are started their operation on and before 2005. The study contains variables
classified in to three as bank specific, Macro economic and regulatory variables among which bank
specific and macro-economic variables is controlled variables because the aim of the research is to
know the impact of COVID-19 pandemic on private banks profitability.

1.5. Significance of the Study

This study was so many significances among those, it enables the stakeholders to know the effect
COVID -19 have on the profitability of the private commercial banks which is important for
decision making by the banks themselves, shareholders and the government. Knowing the
relationship among the variables also helps the government body in policy formulation as they will
be able to anticipate the effect the new technological based policy will have on banks. In addition to
these the research will provide the researcher with the opportunity to gain profound knowledge on
the impact of pandemic disease like COVID-19 on profitability of private commercial banks in

7
Ethiopia and it also help the researcher to get award of Masters of Science in Development
Economics. And finally, the study will have invaluable importance for future researchers who want
to conduct a study in related field.

1.6. Organization of the Study

This research paper has four chapters; the first chapter deals with background information,
Statements of the problem, Objectives of the study, significance of the study, scope of the study and
limitation of the study. The second chapter deals with review of related literature. The third chapter
has research methodology. The fourth chapter deals with data analysis and last chapter has
conclusion and recommendations.

1.7 Limitation of the Study

Some limitations of the study were the following; this study only focus on the research objective
which incorporate the above stated variables, but there may be other regulatory variables that affect
the profitability of private commercial banks. Next, the study only included private commercial
banks that established upon and before 2005 in Ethiopia. From the sample result generalization
would be made to all private commercial banks in Ethiopia. Therefore, it would be difficult to
generalize fully about the impact of COVID-19 on the profitability of private commercial banks in
Ethiopia.

8
 CHAPTER TWO

REVIEW OF RELATED LITERATURE

2.1. Theoretical Literature

2.1.1. Financial Sector and the Covid-19 pandemic

The covid-19 pandemic caused major disruptions in major sectors of many economies including the
financial sector. Government and policymakers have tried various policy interventions to help
reduce the impact of the pandemic on their economies (Sang, 2022). Researchers have examined
how the policy interventions in various countries affected the economic recovery and growth of the
various economies (Yan & Jia, 2022; Katusiime, 2021). For instance, Feyen, Gispert, Kliatskova,
and Mare (2021) examine the factors that influence policymakers' responsiveness and activity in
emerging markets and developing economies. The findings reveal that nations with larger levels of
private debt tend to take banking, liquidity, and finance measures early and that policymakers in
richer and more populous countries reacted quicker and adopted more policy measures. They further
assert that the COVID-19 outbreak, macroeconomic fundamentals, and political environments
appear to have no bearing on the response and activity of policymakers. Feyen et al. (2021) draw
attention to various policy decisions that are at odds with the tenets of international financial
standards and recent guidelines from standard-setting bodies like the IMF and the World Bank, such
as loosening the classification and treatment of non- performing loans. According to Wei and Han
(2021), the emergence of a pandemic has made it more difficult for monetary policy to reach the
financial sector. However, they think that conventional monetary policy can be utilized to boost the
financial market and stop the post-pandemic economic collapse.
Berger et al. (2021) assert that Basel III reforms and several nation-specific enhancements to bank
supervision and regulation have strengthened the banking sector's resistance to COVID-19 shocks.
They contend that national government actions have helped to stabilize the financial sector and, in
some countries, have lessened the pandemic's negative economic effects on the sector's main
activities. In their study of the role of various policy initiatives in resolving bank stress, Demirgüç-
Kunt et al. (2021) evaluate the impact of liquidity support, prudential measures, borrower aid, and
monetary policy measures on anomalous bank returns. They discover that liquidity support and
borrower assistance policies have the biggest positive effects on atypical bank returns and that

9
liquidity support is particularly beneficial to banks with less liquidity.
Furthermore, Demirgüç-Kunt et al. (2021) assert that interest rate policy decreases primarily benefit
banks with less liquidity, demonstrating that monetary policy has played a significant role in this
global crisis. Although these regulatory changes have lessened the pandemic's negative impact on
some banks, this is not the case for all institutions. Elgin, Yalaman, Yasar, and Basbug (2021) make
an interesting point about the relationship between economic policy and central bank independence
(CBI), and they assert that in nations with more independent central banks, the reduction of
monetary policy interest rates and deposit reserve ratios is more constrained, whereas their fiscal and
macro-financial packages are relatively larger.

An unprecedented global epidemic stressed financial markets by threatening not just people's health
but also the whole economy (Goldstein, Koijen, & Mueller, 2021). According to Guo, Li, and Li
(2021), the lockdown and the work suspension measures put the actual economy into a recession,
which led to the financial markets' limited liquidity and increased volatility. The COVID-19
pandemic has had a detrimental effect on the global financial system, which heightens tail risk spill-
overs in the global financial market, according to an analysis of the tail risk contagion between
international financial markets during the pandemic. In a similar vein, Izzeldin, Muradoğlu, Pappas,
and Sivaprasad (2021) looks into how the COVID-19 financial crisis affected stock markets in G7
nations and 10 different business sectors. Their findings indicate that the financial markets in the US
and the UK have been hurt the most. This finding contrasts with that of Nguyen (2022) who
contends that the systematic shock had a particularly negative impact on the utilities, energy, and
real estate sectors as well as the consumer discretionary sector, which includes the travel and luxury
goods industries, and the industrial sector, which includes the airline industry.

In March 2020, the U.S., according to Goldstein, Koijen, and Mueller (2021) treasury bonds,
corporate bonds, and money market funds all underwent significant stress. They think that the Fed's
quick intervention to avert a major financial catastrophe is responsible for at least some of the quick
recovery of the U.S. financial market. The Coronavirus Aid, Relief and Economic Security
(CARES) Act has reduced the likelihood of specific shocks and defaults to some amount, although
there are still big disparities between sectors, according to Kwan and Mertens (2020). Falato,
Goldstein, and Hortacsu (2021) note that the Fed's bond purchase program aids in reversing

10
outflows, particularly for the most vulnerable funds, and that the liquidity assistance trickles down
through funds to the real economy. In their report, they look at the pandemic- related fragility that
these funds experienced and analyze how the Federal Reserve's actions helped to resolve it.
According to their explanation, sector exposure, fire-sale vulnerability, and asset illiquidity are the
key causes of fragility. The findings demonstrate that the Federal Reserve's asset purchase program,
which provides liquidity support for its bond holdings, aids in reducing fragility.

The risk of the complete collapse of the banking system, which is viewed as financial instability, is
the typical definition of systemic risk, according to Borri and Di Giorgio (2021). The rationale is that
a few unique occurrences have contributed to the situation's decline and eventual catastrophe.
According to Duan, El Ghoul, Guedhami, Li, and Li (2021), shocks like the 2008 global financial
crisis boost banks' tail co-movements, which ultimately causes entire financial systems to collapse.
The systemic risk of major European banks is examined by Borri and Di Giorgio in 2021,
considering the previous 20 years and three crises (the Great Financial Crisis, the European
sovereign debt crisis, and the COVID-19 crisis). They focus on the banks in 64 nations in 2020 as
they investigate how the COVID-19 pandemic will affect systemic risk. The findings are consistent
with those made public by Duan et al. (2021), which demonstrate that the pandemic increases the
systemic risk posed by large, highly leveraged, riskier banks with high loan-to-asset ratios.

Portfolio management refers to the prudent management of a bank’s assets and liabilities to attain
the best combination of profit, liquidity and safety (Semirti, 2020). However, this investment policy
can be challenged by the unexpected eruption of COVID-19 pandemic. Practically, an improper mix
of the liquidity, safety and profit likely cause disruption of the whole baking operation and customer
excellency. For instance, if the banks need more profit, they may have to sacrifice some safety and
liquidity. If it seeks more safety and liquidity, it may have to give up some income. In such the
pandemic situation, it might be tricky for managers to determine the optimum balance of liquidity,
safety and profit of the bank because they are opposed to each other. Therefore, the application of
portfolio management theory to investigate the impacts of the Coronavirus on the Ethiopian banking
portfolio was methodologically acceptable whole.

2.1.2. Profitability
One of the principal objectives of a bank is to maximize profit because it is essential for the paying

11
interest to depositors, wage to the staff, dividend to shareholders and meeting other expenses. It
cannot afford to hold a large number of funds in cash for that will mean forgoing income. However,
the conflict between profitability and liquidity is not very sharp. Liquidity and safety are the main
concern for the bank. At the same time, profitability is subsidiary for the very existence of a bank
depends on the first two. Thus, the study adopts this theory to check whether the COVID-19 shock
the profitability of Ethiopian banking. Moreover, the COVID-19 may enforce the manager only to
emphasis on one of the three mainly profitability. At the same time, the portfolio theory stated that
for a bank to earn more profit, it must tone the balance between liquidity and safety. Overall, the
aforesaid facts increase the rationality of applying the Portfolio Management Theory vis-à-vis
examination of the impacts of COVID-19 banks portfolio in Ethiopia. More evidently, the
researchers apply this theory to discover whether the outbreak of 7413 Journal of Positive School
Psychology Coronavirus influence banking portfolio in Ethiopia since it is rudiments to sustain a
sound bank system.

2.2. Related Empirical Literature

2.2.1. Global Banking Sector Studies During the COVID-19 Pandemic Period

Sufficient studies have been conducted to focus on the impact that COVID-19 has on the financial
sector, like the impact that COVID-19 has on the macroeconomic circumstances of a country, on the
banking performance stability, on global bank lending, on the stock performance of banks around the
world, on conventional and Islamic stock performance using market index data and firm-level data
[41], and on listed corporate firms’ performance. The spread of COVID-19 was a shock for the
global economy, significantly affecting the economy. Financial sectors like banks are projected to
exploit this shock examined the systematic risk of banks during the COVID-19 pandemic period.
They tried to estimate which factors influenced the systemic risk of banks. They found a
Sustainability 2022, 14, 6260 4 of 26 highly leveraged large firm with high loans in terms of assets,
insufficient capital supply to operate regular business, and network problems that caused a high
systemic risk for banks during this period. Thus, it has been noted that throughout the COVID-19
era, the non-performing loans (NPLs) of EU banks pose serious risks to banking risk and
profitability. Additionally, compared pre-pandemic era consequences with pandemic period
conditions to estimate the cost of credit risk for Polish commercial banks. In the COVID-19 period,
they discovered that higher return capital pre-pandemic was more circumspect and had to deal with a

12
significantly lower cost of credit risk. On the other hand, during the COVID-19 pandemic, a small
percentage of impaired loans from the pre-pandemic period had slightly faster risk cost rise. It was
discovered that COVID-19's negative impacts on the banking industry were more pronounced and
lasted longer than in other financial firms. Because of their greater liquidity and enhanced capacity
for cooperation, the authors found that larger and publicly traded banks had a decline in stock returns
as a result of absorbing the shock of COVID-19. Studied a low-income nation like Uganda, where
the COVID-19 epidemic adversely affected the banking sector's profitability, considering the bank-
specific variables and the macroeconomic aspects studied the capital structure of banks during this
time, and discovered that capital was crucial for banks to continue lending and to lower the risk of
default both during and after COVID-19. For emphasis, it was said that the intellectual capital (IC)
of banks had a favorable effect on their profitability. They compared the impact of banks' intellectual
capital (IC) on their profitability during the COVID-19 pandemic in Pakistan and China.
Additionally, research the banks that used cutting-edge IT before the pandemic and outperformed
others throughout the COVID-19 era. They concentrated on the technology utilized by banks with a
return that was market-adjusted. During the COVID-19 period, the analysis of loan growth and a
solid deposit position did not support the profitability and stability of the banks in the Central,
Eastern, and Northern EU countries. They sought to demonstrate how COVID-19 will affect banks'
stability and profitability over the long run. However, providing high-quality service may help keep
customers throughout the current crisis. Prior studies interpreted the findings primarily using bank
loans, macroeconomic data, and a small number of COVID-19 cases and deaths. [59] examined the
effects of the COVID-19 epidemic on the Saudi banking index. To perform the research and create
the ANN model, they considered the lockout data with the COVID-19 cases, interest rates, and oil
prices. They discovered that while the announcement of the lockdown and falling interest rates had
an adverse effect on the Saudi banking sector index, rising oil prices and fresh COVID-19 cases had
a favorable effect. In this context, [60] used stock exchange data and Dow Jones Islamic market
index data to examine the effect of COVID-19 on the Islamic bank indices in GCC countries. They
looked on Islamic banks' resilience to financial crises like COVID-19. They demonstrated the
capability of Islamic banks to continually offer competent services. Moreover, [61] assessed the
influence of an internal and external element. The COVID-19 pandemic has had a detrimental
impact on Bangladesh's banking industry [23]. The resilience and sustainability of Bangladesh's
commercial banks during the pandemic period were evaluated and predicted in Ref. [9]. Using the

13
TOPSIS and Hellwig techniques, the authors showed how less than enough capital, a lack of
liquidity, and a high percentage of non-performing loans (NPL) with poor performance led to greater
bank risk.

Similar findings were made by [23], who discovered that reduced liquidity ratios and an unsound
financial situation prior to the COVID-19 outbreak made the banks' financial situation during the
COVID-19 era in Bangladesh worse. They looked at the commercial banks' liquidity and financial
health over a protracted period of time in Bangladesh. They examined the liquidity and financial
well-being of commercial banks in Bangladesh during the continuous period. sing a state-designed
stress-testing model under various NPL shock scenarios, Ref. [62] studied the effects of COVID-19
on the companies' value, capital adequacy, and income from interest of the banking sector in
Bangladesh. During the pandemic, they discovered greater susceptibility in the case of relatively
larger banks. We discovered a ton of research on the COVID-19's effects on the global banking
industry.

Meanwhile, [9, 23, 62] examined the significant effect of COVID-19 on the banking industry from
the viewpoint of Bangladesh. They offered insightful information on the viewpoints of the banks and
other players. To improve the banking study on Bangladesh during the epidemic, we created this
article.

The influence of COVID-19 on banks' overall performance is distinct, as we correctly verified the
above analysis and found. In order to investigate how COVID-19 has affected banks' profitability,
we conducted this study and calculated the financial performance index (FPI) for each individual
bank. In the FPI, we applied a common CAMELS rating scheme. Additionally, we used a
sophisticated approach and a larger range of years in the data sets with more variables to conduct
this study. In addition, the financial performance index (FPI) system with the uniform CAMELS
rating system was employed for the first time in Bangladesh as a way to assess the financial standing
of banks. These are all our paper's significant innovative ideas.

2.2.2 Study of the Banking Sector in Ethiopia during the COVID-19 Pandemic Period
The country's economic growth is significantly harmed by the shock of the money mobilization
institution. The main purpose of the study was to examine how the coronavirus affected the banking
portfolio in terms of profitability risk, credit risk, and liquidity risk. The study looked at how the

14
coronavirus affected bank operations and customer relations in Ethiopia. Both descriptive and
quantitative research methods, as well as primary and secondary data sources, were utilised in the
study. To select the subjects, the researcher used a technique called purposive sampling. Both
descriptive and multiple regression analyses were used in the study's data processing and
presentation goals. According to the report, the profitability, liquidity, and security of the banking
portfolio were all adversely and considerably impacted by the COVID-19 outbreak. The COVID-19
episode has significantly worsened the capital adequacy issue, credit risk, liquidity risk, and
profitability crunch. The researcher also looked into how the Coronavirus outbreak affected
Ethiopia's banking ties (Birhanu Daba Chali and Dr. Deepak Tyagi*, 2022).

Another study that used the input-output methodology to investigate how the COVID-19 pandemic
affected Ethiopia's private banking system and guide interventions and governmental responses. It
used historical data going back to 2010 for ten years to 2019 of the total private commercial banks in
order to investigate patterns and look at how pandemics have affected previous crucial success
elements. The outcome demonstrates that the pandemic has an impact on banks' income and balance
statements. Due to a solid track record of success prior to COVID, the effect is muted this year.
However, it won't take long for the private financial sector to experience the pandemic's effects as
well. Consequently, the idea of giving banks less consideration.

Therefore, the idea that banks are less susceptible to the crisis should be rejected. According to the
report, private banks urgently need roughly 17 billion Birr in liquidity so they can comfortably meet
the NBE's liquidity requirements. Less resource mobilization and fewer loan collections of 10 billion
Birr every quarter will really make this difficult. For the private banking system to remain stable
over time, it will be crucial to take swift action to improve the liquidity (injecting liquidity), capital
position (setting dividend payout limit), asset quality (setting minimum provision level), earning
(avoiding price pressure), and cost (controlling exchange losses) profiles of banks. Additionally, for
a successful corrective measure, the capacity of each bank in the sector to absorb shock should be
examined separately. After COVID-19, the banking industry will be strengthened by new sources of
expansion, including consulting services, e-commerce, digitalization, e-banking services, etc.
Digitalization and the internet will be the future. To accommodate these developments and hasten
the recovery process, comprehensive reform and financial sector restructuring plans should be
considered. (Lellisa, 2020).

15
According to (ALEMAYEHU, 2021), here is the study adopts mixed research approach combining
documentary analysis, in-depth interview and survey. Purposive sampling technique was used to
select banks as well as survey participants. The results of the study revealed that COVID-19
pandemic affects the main commercial banking operations including loan collection and
disbursement, deposit mobilization, foreign currency generation, international trade services, interest
and other incomes of banking services. To absorb the problem commercial banks have taken
different operational measures including loan re-scheduling, providing working capital loan, waiving
service charges, lowering interest rate for customers of highly affected sectors. Finally, the study
recommended possible operational measures to be taken. Commercial banks should lower import-
export related charges, introduce efficient e-banking service, increase saving interest rate to
encourage saving, give advisory services for customers who are struggling to bounce back from the
impacts of the pandemic, should focus on generation of foreign currency by promoting export-
oriented platforms and encouraging remittances and so on in response to the pandemic.

2.3 Literature Gap

As per the theoretical and empirical review of literatures there are different output of COVID -19’s
impact on private commercial Banks which are imposed on banks’ profitability, activity, system,
operations, and of course the pandemic impact which exist in one country is not similar with that of
the others. The information from the theory and empirical studies acknowledged the value of
studying the impacts of COVID-19 on the Ethiopian commercial private banking industry’s
portfolios, liquidity, safety, bank-customer relationship as well as banking operation. In Ethiopia no
similar study was conducted on the consequences of COVID-19 on banking profitability in Ethiopia.
Thus, the study has narrowed the gap by investigating the implications of Coronavirus on the
banking profitability in Ethiopia in line with the financial performance management theory.

16
2.4. Conceptual Frame work

CORONAVIRUS
Bank on equity
Bank Deposit Banking Profitability
Bank Capital
Bank efficiency
Bank asset determinants

In this case, the dependent variable (Y) is BP, independent variables (X) are, BE, BD,
BC, and EFF, during COVID pandemic. The study uses a moderation analysis to test
whether the relationship between the dependent variable and independent variables
depends on the CASES, that is, whether the profitability of the banks is affected by
COVID-19, respectively.

CHAPTER THREE

RESEARCH METHODOLOGY
3.1. Research Methods
The research design is the overall approach you decide to take in order to integrate the various study
components in a logical and cogent manner, thereby ensuring you will successfully address the

17
research problem; it is the general framework for the data collection, measurement, and analysis
processes. (Hamza Kasim and Stephen Kwadwo Antwi, 2016.)

3.2. Research Design

The research design refers to the overall strategy that you choose to integrate the different
components of the study in a coherent and logical way, thereby, ensuring you will effectively
address the research problem; it constitutes the blueprint for the collection, measurement, and
analysis of data.

3.2.1. Explanatory research

Explanatory research type is used in this research because the study was identifying the cause and
effect of COVID-19 pandemic on private commercial banks performance. This study's primary goal
is to determine how the COVID-19, which was brought on by a global pandemic, and Ethiopia's
private commercial banks' financial success relate to one another. Since the aim is to establish a
relationship between variables, the explanatory approach is the most appropriate one.

3.3. Research Approach

The three common approaches to conducting research are quantitative, qualitative, and mixed
methods. The researcher anticipates the type of data needed to respond to the research question.

3.3.1. Quantitative research

Most often uses deductive logic, in which researchers start with objectives and then collect data
which can be used to determine whether empirical evidence to support that hypothesis exists.
Quantitative analysis requires numeric information in the form of variables. The study was based on
quantitative research methodology to construct an empirical model in order to measure the effect of
bank regulation on profitability of private commercial banks in Ethiopian. Specifically, regression
analysis was used to measure the effect of determinants on the dependent variable.

3.4. Sample and Sampling Techniques

The study populations were all private commercial banks in Ethiopia. There are 29 commercial
private banks in Ethiopia as of December 30, 2022 (NBE web). But for the study purpose the
researcher have used sample of seven commercial private banks in Ethiopia. These banks were
selected due to their market share because by conducting research on those major banks it is quite

18
important to generalize to that of small market share. According to NBE (2022) annual report stated
that these seven private commercial banks together accounted for 69% of the market share based on
their number of branches and capital held by all Ethiopian private commercial banks.

The study covered a period of 10 years from 2013-2022 and the sample of private commercial
banks are Dashen Bank S.C, Awash International Bank S.C, Wegagen Bank S.C, United Bank S.C,
Nib International Bank S.C, Bank of Abyssinia S.C and Cooperative Bank of Oromia. Hence, the
researcher employed the technique of purposive sampling to draw the sample from the population
to meet the study objective.

3.5. Data source and Data Collection Technique

In order to conduct any research project; information should be gathered from appropriate sources.
Accordingly, this study has used secondary source of data only. Therefore, the researcher has used
secondary data source which was being panel in nature. A secondary data source is preferred by the
researcher since it is less expensive in terms of time and money while collecting, accessibility and
others (Ghauri, 2005). And also, it affords an opportunity to collect high quality data (Belay, 2012).
Therefore, the audited annual financial statements of the selected private commercial banks were
obtained from NBE from 2013 to 2023. The researcher used cross sectional and time series data and
collected secondary data from National bank of Ethiopia.

3.6. Methods of Data Analysis

In order to achieve the research objective, statistical analyses were carried out using the following
methods: First, descriptive statistics of the variables (both dependent and explanatory) was
calculated over the sample period. This is in line with (Malhotra, 2007), who states that using
descriptive statistics methods helps the researcher in picturing the existing situation and allows
appropriate information. Then, a correlation analysis between variables that are dependent and
independent was made. Finally, ordinary least square/OLS regression approach including all of its
assumptions was employed. The assumptions were examined to check if the regression models
were applicable that was developed to test the relationship of banks profitability and independent
variables. The collected data was analyzed by using Stata15.

19
3.7. Model Specification, Variable Description and Hypothesis

3.7.1 Model specification

The general model to be estimated was the following linear forms which, is adopted from
(Ahokpossi, M. C., Ismail, K., Karmakar, M. S., & Koulet-Vickot, M., 2013). Thus, the general
regression model was as follows:

Iict = α+ β1xBi t + β3 XM i t + ε i t.

Where the subscripts i, c and t represent: respectively individual banks, a country, and the time
variable. α is a constant term, β is coefficients for the respective variables, the dependent variable I
represents bank profit. XB, and XM are respectively bank specific variables and macroeconomic
variables; ε represents the residuals.

Regression is more powerful than correlation. According to (Brooks, 2008) unlike correlation,
when it comes to regression if x has significant impact on y, thus change in y is influenced by
change in x. Therefore, to observe the impact of independent variables measures on banks
performance, the significant factors affecting banks performance were used as the representatives
for the variation in performance. Therefore, the RERM were used to observe the impact of bank
specific variables as well as macroeconomic variables on banks performance.

The model can be written as follows:

Model: Return on Assets (ROA)

ROA = α+β1 BE + β2 BCR + β3 BD + β4 BC + β5 EFF + β6INF + β7GDP + μ

α is constant (intercept)

- β_1, β_2, β_3, β_4, β_5, β_6, β_7, are coefficient and μ is stochastic variable (error term)

BE = Bank equity

BCR= Bank credit

BD= Bank deposit

BC = Bank capital

20
EFF= Efficiency

INF = Inflation

GDP = Gross Domestic Product

In nut shell, Variables On the left-hand is dependent and variables on the opposite side are
independent.

3.8. Study Variables

3.8.1. Dependent variables

Performance

(Flamini, 2009), Proved that return on assets (ROA) as a measure of bank performance. It defined as
the banks’ after-tax profit over total assets. In principle, ROA reflects the ability of a bank’s
management to generate profits from the bank’s assets. It shows the profit earned per dollar of
assets and most importantly, reflects the management’s ability to utilize the bank’s financial and
real investment resources to generate profits, although it may be biased due to off-balance-sheet
activities, which is the reason why Some Empirical researches proposed to use the net interest
margin to overcome the off-balance sheet (OBS) bias. For any private commercial bank, ROA
depends on the bank’s policy decisions as well as uncontrollable factors relating to the economy
and government regulations. Many regulators believe return on assets is the best measure of bank
profitability and it emerges as the key ratio for the evaluation of bank profitability (IMF, 2002).

According to (Mateev, M., Sahyouni, A., & Al Masaeid, T. , 2022) study’s findings support the
current assumption that efficient banks are able to survive during global financial meltdowns, and
they highlight the relevance of banking regulatory reforms that increase efficiency in combating the
negative effects of the recent (COVID-19) crisis. Since the main purpose of this study is to assess
how the COVID-19 pandemic has affected private commercial banks' profitability, this research
will use ROA and NIM as the measure of banks performance.

3.8.2. Independent variables

The independent variables are categorized into bank specific and macroeconomic variables. The
researcher has taken the bank specific and macroeconomic variables as control variables, since the

21
objective of the study is to find out the impact of COVID-19 Pandemic on private banks’
performance in Ethiopia.
A. Bank specific variables

Bank equity:

It refers to the book value of equity divided by the total value of assets. Some theories ((Berger,
1995)suggest that well-capitalized banks are subject to less expected bankruptcy costs and hence
lower cost of capital. According to this view, higher bank equity ratios may influence bank
performance positively when loan rates do not vary much with bank equity.

The bank’s return on equity (RoE) needs to be greater than its cost of equity in order to create
shareholder value. (Bank, 2010). According to (Ngo, Thanh Xuan, Bui, Phương Linh, Le, Minh
Huong, 2021) research findings indicate that when a bank’s profitability is measured across the full
research period, the equity capital ratio has a detrimental effect ROE and a favorable effect on
ROA. A detailed examination of the period from 2013 to 2019, five years following the financial
crisis, reveals that the CAP variable has a positive effect on both ROA and ROE, indicating that
banks with a higher capital-on-assets ratio achieved greater profitability.

The level of banks’ resilience to the extraordinary impulses brought on by COVID-19, varied
across the region. Equity capital of banks located in EU countries is less sensitive to extraordinary
increases in nonperforming loans than their competitors in non-EU countries, which include results
from their better capital endowment to date, as well as lower levels of nonperforming loans (Kozak,
2021).

H1: Bank equity has a positive and significant effect on banks’ performance.

Bank credit:

Commercial banks are financial intermediaries whose main business is absorbing deposits and
issuing loans, and their profitability highly depends on the credit disbursement and credit
management. Highly loan disbursement has a considerable influence on profitability (Shawuya
Jigeer, Ekaterina Koroleva, 2023)

H2: bank credit has a positive and significant effect on banks’ performance.

Bank deposit:

22
To show this relationship, here is the study used the regression technique in analyzing the data and
from the empirical results; the study's findings has enabled the researcher to reject the hypothesis
and to achieve the objectives of the study. Based on the investigation's results, it is possible to draw
the opposite conclusion from the hypothesis and conclude that bank deposit growth has a major
impact on profitability. The regression output indicated that deposit growth has an impact on the
Profitability of private commercial banking institutions. This ensures that the banks need to change
the deposit to the bank’s profitability through disbursement of loan; it meant they should increase
their efficiency accordingly (Sisay, 2017)

The increase of commercial bank deposits is positively and statistically significantly 10 impacted by
the banks' profitability. According to the study, Ethiopian commercial banks need to increase
deposit mobilization by focusing more on internal factors under management while also considering
the impact of the country's overall economic situation, natural pandemic risk, and political climate
(Nesru Kasim Banke & Mekonnen Kumlachew Yitayaw, 2022).

The Covid-19 pandemic has impacted the banking sector, resulting in poor financing due to debtors'
disbursements as a result of the large number of people losing their jobs and difficulties in financing
payments. The study aims to analyze the Financial performance of Islamic Banks during the Covid-
19 pandemic, using records of annual financial statements from 2011 to 2020 through Multiple
Linear Regression testing and linearity testing of the model used Ramsey test. As a result of this
study, the results of the t test found that the Financing to Deposit Ratio (FDR) had a positive and
significant effect on Financial performance (ROA) (Ichsan, R., Suparmin, S., Yusuf, M., Ismal, R.,
& Sitompul, S . Budapest International Research and Critics Institute-Journal (BIRCI-Journal),
4(1), 298-309., 2021).

H3: Deposit mobilization has a positive and significant impact on banks’ performance.

Bank capital:

It was as expected that the debt to asset ratio used to gauge capital structure/leverage had a
statistically major negative relationship with profitability. This result also supports the pecking
order theory and prefers using internal finance before raising debt or equity (Hailu, 2015). Recent
research shows that a well-capitalized banking sector is a major factor driving the speed and breadth

23
of recoveries from economic downturns. In particular, loan supply is negatively affected by low
levels of capital (Schularick, M., Steffen, S., & Tröger, T. H. , 2020).

H4: The bank capital structure has a negative and significant impact on banks’ profitability.

Operating Efficiency:

Measure of how the bank is managing operating costs; it is measured as the ratio of an operating
expense to total assets. The research conducted in Egyptian listed companies; using a research
sample of 65 non-financial listed firms during the period 2013-2019, it run a multiple regression
models to test the impact of operational efficiency, ROA and examines the impact of operational
efficiency and financial performs have a positive significant impact ( Abd-Elmageed, M. H., &
Abdel Megeid, N. S, 2020).

According to (Mirza, N., Hasnaoui, J. A., Naqvi, B., & Rizvi, S. K. A. , 2020) during the diesis
pandemic it was stressed times, funds with higher human capital efficiency tend to outperform their
counterparts. This phenomenon remained consistent while the Covid-19 continued to escalate, and
funds with lower HCE experienced significant performance deterioration. While these findings
present an essential aspect of the performance of Latin American funds, the situation surrounding
the Covid-19 is very dynamic. Also, efficiency measures on improving the competitiveness of the
organizations. The strengthening of internal efficiency management should be the first goal of
promotion in industry. Improving efficiency can be a highly creative and satisfying process.
Efficiency of the breeding group is in large part driven by management. The promotion of
sustainable efficiency development and profitability use is likely to become an increasingly
important policy issue as policy and lawmakers from industrialized and developing countries
address and incorporate environmental concerns into their decision making. Basic efficiency
management laws should adopt policies and create the principal legal foundation for government
intervention aimed at efficiency strength of economic activity. The researcher identified that
efficiency and profitability are significantly correlated (Priya, 2013) .

H5: Operating efficiency has a positive and significant impact on Banks’ performance.

B. Macroeconomic Indicators

24
The researcher will use two proxies for the macroeconomic environment: inflation and GDP per
capita growth. Previous studies reported a positive relationship between inflation and bank
profitability. High inflation rates are generally associated with high loan interest rates which
resulted in high incomes.

However, if inflation is not forecasted and banks are reckless in adjusting their interest rates then
there is a possibility that bank costs may increase larger than bank revenues and hence adversely
affect bank profitability (Noor and Ahmad 2010). According to Paul, 2014 inflation has a
considerable beneficial impact on bank profits. The Bank profitability is likely to benefit from GDP
growth according to the well-documented literature on relationship between growth in the economy
and the financial sector performance. Other researchers who established a beneficial impact of GDP
growth on bank performance includes (Kagecha, P. Sifan, 2016). According to research done by
various researchers between 2007 and 2015, real GDP growth has a negative and statistically
significant impact on banks' return on assets. Long-term real gross domestic product growth has a
negative and statistically significant impact on banks' return on assets, whereas the inflation rate has
no impact (Adama Combey & Apélété Togbenou, 2017).

25
 CHAPTER FOUR

DATA ANALYSIS AND DISCUSSION

In this chapter, the researcher presents and analyses the results obtained from Stata14 edition
econometric modeling software. The research findings will be interpreted by the following sections:

4.1. Descriptive Statistics

This section provides the descriptive statistics of both dependent and independent variables which
help to have the overall look at variables being studied. It indicates the result of all variables
calculated as mean, median, standard deviation, minimum and maximum values with the number of
observations under the study in tabular form. Hence, table 4.1 below presented the descriptive
statistics values of the study variables for the study period and all variables comprised 70
observations.

The dependent variable is bank profitability measured by ROA. The independent variables were
classified in to macroeconomic variables and bank-specific factors. Bank specific (deposit, bank
capital, bank credit, efficiency and bank equity), and macro-economic variables (GDP and Inflation)
are considered as control variables. Mean value shows the average value of all sampled banks in
each variable; whereas the minimum and maximum as the name indicate minimum and maximum
values of each variable. Sample variation from the mean was shown in the standard deviation
statistics which is the square roots of the variance.

Table 4.1 provides a summary of the descriptive statistics

. import excel "C:\Users\getuzs\Desktop\raw data XXXX ROA der.xlsx", sheet("Sheet3") firstrow

. summarize BP BE BCR BD BC EFF INF GDP, separator(8)

Variable Obs Mean Std. Dev. Min Max

BP 70 897.1898 892.7849 39.03154 5341.235

BE 70 .2138057 .0685073 .0266 .411
BCR 70 24787.7 25932.4 2079.719 126894.7
BD 70 32651.26 29293.59 4465.04 148028.6
BC 70 2644.905 2021.884 454.3 10292.8
EFF 70 .7154229 .3485443 .0612 1.6348
INF 70 .1514 .0779294 .074 .301
GDP 70 234677.3 709071.9 13.996 2346644

Source: Own computation through STATA 15

26
Table 4.1 provides a summary of the descriptive statistics of both the dependent and independent
variables. The return on asset as the measurements of profitability indicates that the Private
commercial banks in Ethiopia have an average positive profit over the past ten years (decade).

From the total of 70 observations the mean of BP equals to 39.0 with a minimum and the maximum
of 5341.2, this means the most profitable bank among the sampled earn 39.0 cents of net income
from a single birr of asset invested the minimum profit of 39.0% and 53.2% maximum profit on each
birr of asset invested.

The average value for equity investment as measured by log of equity invested amount was; 0.2138
with standard deviation of .6850, maximum of .411 and the minimum of .0266. Form the sample the
minimum value 2.734907 indicates most banks desire to participate on equity investment in recent
years. The average value for bank credit was with standard deviation of 25932, maximum of 126894
and minimum 2079.7. This means most of the sample banks meet their loan plan. The mean value of
bank deposit was 32651.26 and maximum and the minimum value of 4465 and 148028 respectively.
This result shows that provides the evidence that most of private commercial banks in Ethiopia
maintain high level of deposit mobilization during last ten years.

Table 4.1 also shows the descriptive statistics of bank capital and efficiency are normally distributed
around the mean with minimum standard deviations.

4.2. Correlation Analysis

Correlation is a way to index the degree to which two or more variables are related to each other.
Correlation coefficient between two variables ranges from +1 (i.e. perfect positive relationship) to -1
(i.e. perfect negative relationship). The positive sign indicates increase in one variable will increase
the other variable. On the other hand, a negative sign means increases in one variable will reduce the
other variable. If it is stated as y and x are correlated, this means that y and x are being treated in a
completely symmetrical way. Thus, it is not implied that changes in x cause changes in y, or indeed
changes in y cause changes in x rather it is simply stated that there is evidence for a linear
relationship between the two variables, and that movements in the two are on average related to an
extent given by the correlation coefficient (Brooks, 2008). Hair et.al. (2006) argue that correlation
coefficient below 0.9 is a healthy correlation. Hence, table 4.2 indicated the correlation between
dependent and independent variables of the study.

27
Table 4.2. Correlation among the dependent and independent variables

BP BE BCR BD BC EFF INF GDP

BP 1 0.452 .9274 .9315 .9209 -0.2218 .6606 0.5495

8

Source: Own computation through STATA 15.

Output of correlation analysis (Table 4.2) represents the matrix of pair-wise correlation. The
calculated correlation between dependent variables and bank specific variables indicate that ROA is
positively correlated with bank equity, bank credit bank deposit, bank capital GDP and inflation with
a correlation coefficient of 0.4528, 0.9274, 0.9315, 0.9209, 0.5495 and 0.6606 respectively,
efficiency has negative correlation with ROA with a correlation coefficient of –0.2218.

4.3. Model Selection

4.3.1. Random Effect versus Fixed Effect Models

A panel data regression model, which can be either fixed effects or random effect model, was used
to investigate the econometric model used to examine the impact of the diesis outbreak on the
profitability of Ethiopian private commercial banks. The appropriate test used to decide whether
fixed effect or random effect model is appropriate was Hausman Specification Test. Thus, Hausman
Specification Test identifies whether fixed effects or random effect model is most appropriate under
the null hypothesis that unobservable individual effects (ui) are uncorrelated with one or more of
explanatory variables (Xi). As noted by Gujarati (2004), fixed effect model is most appropriate when
null hypothesis is rejected whereas random effect is appropriate when null hypothesis is not rejected.

For Hausman test, the null and alternative hypotheses are as follows:

Ho: ui is not correlated with Xi (random effects model appropriate)

H1: ui is correlated with Xi (fixed effects model appropriate)

Thus, to test the null hypothesis, it requires comparing the estimates from the random effects and the
fixed effects estimator. Random effect estimator is consistent under the null hypothesis. If the
estimates for the random effects estimators are not noticeably different from the estimates for the

28
fixed effects estimator, then the null hypotheses is acceptable and conclude that ui is not correlated
with Xi, and therefore the random effect model is the appropriate model. In addition, if the
probability of the test result greater than 5% the random effect model is appropriated. If the
estimates for the random effect estimator are significantly differ from the estimates for the fixed
effect estimator, the null is rejected and conclude that ui is correlated with Xi, and therefore the fixed
effect model is the appropriate model for the study. Even though fixed-effect meta-analysis is
assumed to be common to every study, Study weights are more balanced under the random-effects
model than under the fixed-effect model (Michael Borenstein, L. V. Hedges, J. P. T. Higgins and H.
R. Rothstein, 2009)

Accordingly, appendix-6 demonstrates the Hausman Specification Test that used to decide the ideal
model for this investigation. The decision rule, for Hausman Specification test is rejecting the
alternative hypothesis when the p-value greater than 5%. Thus, as shown in Appendix, the Hausman
specification test for this study has a p-value of 0.58 for model one performance regression models.
This indicates that p-value is not significant and then the alternative hypothesis is rejected justifying
as random effect model is appropriate for the given data set in this study.

4.4. Diagnostic Test

After choosing whether fixed or random effect model is appropriate for the study, the next step was
performing CLRM assumptions and diagnostic test. This was important to figure out whether the
data and the model for this study were fit or not according to the test.

4.4.1. Test for Average Value of the Error Term is Zero

As per Brooks (2008), the first assumption required that the average value of the error is zero (E (ut)
= 0). In fact, if a constant term is included in the regression equation, this assumption will never be
violated. Therefore, since the constant term (i.e. α) was included in the regression equation, the
average value of the error term in this study was expected to be zero.

4.4.2. Normality Test

H0: data is normally distributed

H1: data is not normally distributed

Shapiro-Wilk W test for normal data

29
 Table.4.3. Shapiro Wilk statistics result to test Normality of BP

Variable Obs W V z Prob>z

Resid 70 0.9822 1.093 0.194 0.42328

Source: Own computation through STATA15

Based on the result described in appendix 3, the probability of Shapiro-Wilk of performance

indicated in the above table is 0.42328. Hence, the null hypothesis which states the error term is
normally distributed should not be rejected because the p-value in both cases is greater than 0.05.

4.4.3. Heteroscedasticity Test

The homoscedasticity assumption for multiple regression, states that the variance of the
unobservable error, u, conditional on the explanatory variables, is constant. Hence, the
homoscedastic assumption fulfilled when the variance of disturbance term is constant and the same
for all observation. The homoscedastic assumption will be broken if the disturbance terms do not
have a constant variance across all observations. The violation of this assumption said to be
heteroscedasticity. If the problem heteroscedasticity exist in the model, the least squares estimators
are still unbiased(consistent) however the Gauss- Markov theorem was violated in other words
confidence interval will be unnecessary larger . As result, the t-test and f-test gives in accurate result
because of over estimation of variance the t-test will be smaller and statistically insignificant which
leads to wrong conclusion (Gujarati, 2004). There are several tests present to detect the violation of
this assumption. This study used Breusch-pagan test in order to check the presence of the problem of
heteroscedasticity for both models.

Table 4.4: Heteroscedasticity test output for BP

Ho: Constant Variance

Variables: fitted values of BP
Chi2(1) 1.53
Prob> chi2 0.2154

Source: Own computation through STATA 15

30
As it is indicated above the result of heteroscedasticity test shows that p- value of statistic is 0.2154
for BP which is more than 5% significance level. Therefore, the null hypothesis of homoscedasticity
is failed to reject at 5 percent level of significance. This implies that, there is no tangible evidence
for the existence of heteroscedasticity in the first and second model.

4.4.4. Autocorrelation Test

Pesaran CD test is a test which help to know whether there is serial correlation or not among the
variables.

Ho: There is no serial correlation

H1: There is serial correlation

Table 4.5 Pesaran CD test output for BP

Pesaran's test of cross-sectional independence = 0.005, Pr = 0.9962 for BP

Source: own computation through STATA 15

Table 4.5: shows that there are no auto correlation problems because the p-value result is greater
than five percent in both measures (Gujrati, 2004).

4.5. Results of the Random Effect Regression Model

In this section the discussion of random effect regression model results was presented. The
regression results have their own implications, and hence beta indicates each variable’s level of
influence on the dependent variable which may has a coefficient of negative or positive. P-value
indicates at what percentage or precession level of each variable is significant and R2 within value
indicate the explanatory power of the model. Accordingly, the results of random effect regression
model in this study were presented in Table 4.6.

Model: - the linear regression model used to find the statistically significant regulatory variables
impact on banks profitability measured by BP was:

BP = α+ β1BE + β2BCR + β3BD + β4BC + β5EFF + β6INF + β7GDP + μi

31
Table 4.6 Regression results
BP Coef. Std. Err. t p>|t| (95% Conf. Interval)
BE 2409.833 605.9402 3.98 0.000 1198.575 3621.09
BCR -.0184.96 .0136539 -1.35 0.182 -.0457034 .0088842
BD .0283597 .0116492 2.43 0.018 .0050732 .0516461
BC .314055 .0667104 4.71 0.000 .1807029 .4474071
EFF -95.39698 132.7756 -0.72 0.475 -360.8117 170.0177
INF -3784.76 790.7931 -4.79 0.000 -5365.489 -220.3.944
GDP .0000885 .0000667 1.33 0.189 -.0000448 .0002217
Cons -297.8471 150.0017 -1.99 0.052 -597.6963 2.001971
Obs = 70
R-sq: within = 0.9312
F (7,62) = 134.42
Prob> F = 0.0000

Source: Own computation through STATA 15.

The above table presents the results of bank performance (BP) as dependent variable and bank
specific and macroeconomic (control) variables as explanatory variables for the sample of seven
private commercial banks in Ethiopia. The regression results, R2 within have the value of .20%
which revealed that the explanatory power of the model was very good. The value 0.9312 could be
explained as 93% of the total variability of bank profit value is explained by the model.

And also, the overall test of significant F statistics shows that the model was good enough fitted and
statistically significant at 1% level (i.e. p-value = 0.000).

In general, the above table 4.6 indicated that; out of the total seven explanatory variables of the study
three of them were statistically significant at 1% level (i.e. BE, BC, and INF). The other one the
variable was statically significant at 5%. The rest three variables (BCR, EFF, and GDP) had no
statistically significant impacts on Profitability measured by BP for the period from 2013-2022.

32
4.6. Discussion of the Regression Results
Table 4.2 and Table 4.6; Present regression outputs for private commercial banks profitability which
is measured by BP on bank specific and macroeconomic variables. The results were discussed as
follows.

Bank specific Variables

As we have seen the regression output there are five bank specific variables that are used in this
study namely bank equity, bank credit, bank deposit, bank capital and efficiency. The result of
regression output varies depending on the model used.

Bank Equity with BP

According to Table 4.2 bank equity is positively related with (ROA) with a coefficient estimate
of .4528 Which means holding other factors constant, a 100% increase in investment in equity
increase ROA by 45% and the p value of BE (i.e. 0.000) reveals that it is statistically highly
significant at 1% level of significance. According to findings of Franciso (2010), the effect of bank
equity on BP was consistent.

Bank Credit with BP

According to Table 4.2 and 4.6, bank credit had a positive but statistically insignificant effect on
banks profitability measured by Return on Asset with a coefficient estimate of 0.9274 and p value of
0.182 which is statistically insignificant at 10% level of confidence. Since the coefficient was
statistically insignificant we could not say it show positive impact on banks profitability.

Bank Deposit with BP

According to Table 4.2 and 4.6, bank deposit had positive and statistically significant impact on
banks performance measured by ROA. The coefficient estimates and the p value was .9315 and
0.018 respectively which was significantly affect at 10% confidence level.

Bank Capital with BP

According to Table 4.2 and 4.6, Bank capital had a positive and statistically significant effect on
banks profitability measured by Return on Asset with a coefficient estimate of .9209 and p value of

33
0.000 which is statistically significant at 1% level of confidence. Holding other factors constant
100% increase in capital requirement will increase banks profitability by 92%.

Bank Efficiency on BP

According to Table 4.2 and 4.6, bank efficiency had a negative and statistically insignificant effect
on banks profitability measured by Return on Asset with a coefficient estimate of .2218 and p value
of 0.475 which is statistically insignificant even at 1% level of confidence. Since the coefficient was
statistically insignificant we could not say it show negative impact on banks profitability.

Macroeconomic

The macroeconomic factors proxies were GDP and Inflation, GDP and inflation has positive effect
with ROA, and GDP has statistically insignificant effect on return on asset. According to table 4.2
results show that INF has positive effect and statically significant at 1% level with ROA. The last ten
years gross INF positively and statistically significant effect on banks’ return on assets.

4.7. Time Series Analysis to find out COVID 19 impact on each variable
Figure 1. demonstrates a time series of ROA and Efficacies of some selected private commercial
banks. The reason for the time series analysis is that it enables us to observe the extent to which
selected private commercial banks’ profitability and efficiency has been affected during the COVID-
19 pandemic more clearly and intuitively. Therefore, this result provides evidence that no major
impact of the COVID-19 pandemic on the profitability and show impact on efficiency of the banks.

Figure 1: Time series of ROA and Efficiency of some selected commercial banks

16
14
12
10
8
6
4
2
0
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

ROA EFF

34
 Figure 2: Time series of BE, BCR, BD, and BC of some selected private commercial banks

200000
BE 160000
3 120000
2.5 BC
2 BE 80000 BCR
1.5
1 40000 BD
0.5
0 0
13 1 4 15 1 6 17 1 8 19 2 0 21 2 2 1 3 14 15 1 6 17 18 1 9 2 0 2 1 22
2 0 20 2 0 20 2 0 20 2 0 20 2 0 20 20 2 0 2 0 20 2 0 2 0 20 20 20 2 0

Figure 2 demonstrate a time series of BE, BCR, BD, and BC of some selected private commercial
banks. The reason for the time series analysis is that it enables us to observe the extent to which
selected private commercial banks’ BE has been affected during COVID-19 and intuitively.
Therefore, this result provides evidence that no major negative impact of the COVID-19 pandemic
on the BC, BCR and BD.

35
 CHAPTER FIVE

CONCLUSION AND RECOMMENDATION

5.1. CONCLUSION
The objective of this study was to understand economic impact of Covid-19 outbreak on bank
industries on selected commercial banks in Ethiopia. The populations of the study were 29 private
commercial banks in Ethiopia, but for the study purpose the researcher used sample of seven private
commercial banks. The data used in this study was secondary data which collected from NBE. In
order to achieve the stated objectives, statistical analyses were carried out using the following
methods: Firstly, descriptive statistics of the variables was made over the sampled period, correlation
analysis was made and Hausman fixed-random specification test was employed to select from the
two models and accordingly, random effect model was selected and used. Finally, CLRM
assumptions and diagnostic test were held. The results of fixed effect regression model analysis
showed that bank equity had positive and statistically significant effect on banks profitability while
bank credit and efficiency had negative and insignificant effect on profitability. Bank deposit had
positive and significant effect on profitability measured by ROA. Bank capital had positive and
significant impact on profitability. Among the control variables GDP had positive and statistically
insignificant effect on bank profit. And Inflation had negative and statically significant effect on
bank profit. Finally, the researcher finds out the status of variables those determine the banks’
performance of during COVID 19 pandemic and lockdown of the global economic and social
movement.

As a consequence, the COVID-19 crisis reshaped the financial institution landscape and enables us
to foresee the consistencies trends of the banks’ capital, deposit and credit in the last ten years.
Therefore, it is of paramount importance to examine the effect of the outbreak on the seven banks,
given the important role of the banking industry in the economy. This paper offers a systematic
analysis to examine the impact of COVID-19 on the financial performance of the banking sector in
Ethiopia.

36
5.2. RECOMMENDATIONS
Based on the findings the researcher recommends banks and financial institutions to minimize their

risk or down warding their business performance.

 They should have to take strategic tactics of services and product supplying way to retain profit

growth rate.

 The banks should have to prepare alternatives way of providing services and product.

 The banks should prepare separate risk management policies for like pandemic management.

 The banks should have changed the customer segment during like this risk.

 The bank should have provided credit for the customer invests on contactless business.

 The banks should diversify their product portfolios.

 The banks should increase shareholders’ fund in order to minimize over all capital

unsustainability.

 The banks should diversify their operations activities from labor load based to full technology

based.

 The bank should adjust their balance sheets that depend on liability or customer deposit to

equity or capital.

 The bank should increase retail depositors in order to avoid the risk of default loan and profit

minimizing during crises.

 The bank should develop economic and financial analyst division who can forecast the coming

economic and finance era.

37
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Appendixes

Appendix-1 Result of Descriptive Statistics of the Variables

Appendix-2 Correlation between Dependent and Independent variable

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Appendix-3 Normality Test Result

Normality Test output for BP

. swilk resid

Shapiro-Wilk W test for normal data

Variable Obs W V z Prob>z

resid 70 0.98224 1.093 0.194 0.42328

Appendix-4 Heteroscedasticity test Result

Heteroscedasticity test result for BP

Breusch-Pagan / Cook-Weisberg test for heteroskedasticity

Ho: Constant variance
Variables: fitted values of BP

chi2(1) = 1.53
Prob > chi2 = 0.2154

Appendix-5 Test for Auto Correlation

Pesaran's test of cross sectional independence = 0.005, Pr = 0.9962

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