The Impact of Asset & Liability Management on Profitability: Evidence from Selected Private Commercial Banks in Ethiopia

Hussein Abdulkadir Roba; Habtamu Alebachew Legass

doi:doi:10.11648/j.ijfbr.20241006.11

Research Article |

| Peer-Reviewed

The Impact of Asset & Liability Management on Profitability: Evidence from Selected Private Commercial Banks in Ethiopia

Hussein Abdulkadir Roba, Habtamu Alebachew Legass^*

Published in International Journal of Finance and Banking Research (Volume 10, Issue 6)

Received: 5 October 2024 Accepted: 29 October 2024 Published: 28 November 2024

Views: Downloads:

Download PDF

Share This Article

Twitter
Linked In
Facebook

Abstract

This research meticulously investigates the intricate interplay between Asset and Liability Management (ALM) practices and the profitability dynamics of selected private commercial banks in Ethiopia over the period spanning 2011 to 2023. Employing a comprehensive fixed effect balanced panel regression analysis across a time horizon of 13 years and encompassing data from ten meticulously chosen banks, this study sheds light on critical aspects of financial management in the banking sector. Utilizing a quantitative approach and an explanatory design rooted in secondary data extracted from audited financial statements, the study rigorously examines a spectrum of key variables. These variables include income diversification, liquidity, bank size, GDP, asset quality, capital adequacy, loan and advance, and operational efficiency, all meticulously analyzed using E-view 12 econometrics software. The research findings underscore the pivotal significance of certain factors in enhancing bank profitability. Notably, asset quality, liquidity ratio, GDP, loan and advance, and bank size emerge as positive influencers on bank profitability, exhibiting statistically significant impacts. Conversely, operational efficiency and income diversification were found to exert negative effects on profitability. Surprisingly, capital adequacy was established as statistically insignificant in this context. This study accentuates the critical importance of asset quality, operational efficiency, liquidity management, bank size, GDP, income diversification, and loans as fundamental drivers of banks' return on assets. By accentuating the strategic significance of these variables, bank managers are equipped to navigate the complex financial landscape, leveraging effective ALM strategies to optimize profitability and ensure sustained financial viability.

Published in	International Journal of Finance and Banking Research (Volume 10, Issue 6)
DOI	10.11648/j.ijfbr.20241006.11
Page(s)	104-117
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2024. Published by Science Publishing Group

Keywords

Profitability, Commercial Banks, Asset Liability Management, Loan and Advance

References

[1]	Angelopoulos, P. and Mourdoukoutas, P. (2001). Banking Risk Management in a Globalizing Economy, Greenwood Publishing Group.
[2]	Athanasoglous P. et al., (2005). Bank-Specific, Industry- Specific and Macroeconomic Determinants of Bank Profitability, Bank of Greece Working paper, No. 25.
[3]	Belete, T. (2013). Asset Liability Management and Commercial Banks Profitability in Ethiopia, Journal of Finance and Accounting, 4, 10, 2222-1697.
[4]	Bhunia, A. (2010). A trend analysis of liquidity management efficiency in selected private sector Indian steel industry, International Journal of Research in Commerce and Management, 1(1), 1-5.
[5]	Bourke, P. (2001). Concentration and other determinants of bank profitability in Europe, North America and Australia. Journal of Banking and Finance, 1(2)1-7.
[6]	Braumoeller, B. F. (2004). Hypothesis testing and multiplicative interaction terms. International Organization, 58(4), 807-820.
[7]	Brooks, C. (2008). Introductory Econometrics for Finance, 2nd ed., Cambridge University Press, New York.
[8]	Brusov, P., Filatova, T., & Orekhova N. (2013). Absence of an optimal capital structure in the famous trade-off theory, Journal of Reviews on Global Economics, 2, 94- 116.
[9]	Canner, N. Gregory, M. &David, N. (1997). An asset allocation puzzle. The American Economic Review, 87 (1): 181–191.
[10]	Charumathi, B. (2008). Asset Liability Management in Indian Banking Industry; with special reference to Interest Rate Risk Management in ICICI Bank, World Congress on Engineering, July 2 – 4, London, UK.
[11]	Cooper and Schendlar, C. D. (2003). Business Research Methods. (8th, Ed.) New York: McGraw-Hill/Irwin.
[12]	Darush, Y. (2013). Asset liability management micro firms: evidence from Swedish data, International Journal of Managerial Finance, 9(2), 151 -160.
[13]	Division of Thomson Learning. (2013). Introductory Econometrics: A modern Approach. Fifth edition South Western engage.
[14]	Dr. Elsayed Elsiefy (2013). Determinants of profitability of commercial banks in Qatar International Journal of Economics and Management Sciences. Vol. 2, No. 11, 2013, pp. 108-142.
[15]	Emmanuel, N. R, (1997). Commercial Banking in an Era of Deregulation, Greenwood Publishing Group, 3rd Ed.
[16]	Evans T (2017). Asset Liability Management and the Profitability of Listed Banks in Ghana IOSR. Journal of Economics and Finance (IOSR-JEF) Volume 8, Issue 3 Ver. IV (May - June 2017), PP 09-14.
[17]	Fesha B. (2018). Determinants of profitability of commercial banks in Ethiopia Addis Ababa University College of Business & Economics Department of Accounting and Finance.
[18]	Financial System Regulation, Deregulation and Saving Mobilisation in Nigeria, African Economic Research Consortium, Nairobi, Kenya. Stierwald, A. (2010).
[19]	Francis, M. E. (2007). Determinants of Banks‟ Profitability in Sub-Saharan Africa, Journal of International Finance 88, 26–51. Geda, A. (2006). Structure and Performance of Ethiopia„s financial sector in the pre & post reform period: with special focus on banking, Research paper no. 2006/112, Addis Ababa University.
[20]	Gikonya, S. W. (2011). The relationship between asset-liability management and profitability of Commercial banks in Kenya, Unpublished MBA project, University of Nairobi.
[21]	Gujarati, D. (2004). Basic Econometrics, 4th ed. New York: McGraw-Hill.
[22]	Habtamu A, L, Hussen A, R & Semira J. Internal Audit Effectiveness and Its Determinant Factors in Commercial Banks of Ethiopia: The Case of Bale Robe Town. International Journal of Accounting, Finance and Risk Management. Volume 8, Issue 2, June 2023, pp. 49-56. https://doi.org/10.11648/j.ijafrm.20230802.13
[23]	Habtamu A, L, & Zemenu F. Determinants of Commercial Banks Credit Growth in Case of Ethiopian Commercial Banks. IISTE Developing country studies. Vol 11 No 2, 2021.
[24]	Habtamu A, L, & Zemenu F. Determinants of Banks Liquidity: In Case of Commercial Banks in Ethiopia. Research journal of Finance and Accounting. https://doi.org/10.7176/RJFA/13-8-06 Vol 13, No 8(2022)
[25]	Jappelli, T. & Pagano, M. (2002). Information sharing, lending and defaults: crosscountry evidence, Journal of Banking & Finance, 26, 17-45.
[26]	Keynes, J. M. (1989). The Collected Writings of John Maynard Keynes, London: Macmillan for the Royal Economic Society Kosmidou, K. (2008). The determinants of banks profits in Greece during the period of EU Financial integration. Journal of Managerial Finance. 5(1), 85-88.
[27]	Madiri T (2015). Significance of assets and liabilities management to liquidity risk for Zimbabwean commercial banks. National university of science and technology faculty of commerce.
[28]	Marcus, A. J. (1983). The bank capital decision: a time series-cross sectional analysis. Markowitz, H. (1952). Portfolio Selection, Journal of Finance 7.
[29]	Mihail I. C. (2009). Effects of Asset Liability Management in Banks. An Empirical study of Banks in Europe. Faculty of Finance.
[30]	Modigliani, F. & Miller, H. (1958). The cost of capital, corporation finance, and the Theory of Investment, American Economic Review 48, 261-297.
[31]	Moore, R. (2006). The impact of asset and liability management on financial performance of commercial banks in United Kingdom, Journal of finance and Accounting, United Kingdom. National bank of Ethiopia directive no NBE. SBB/57/2014 NBE Directives No. SBB/9/95. (n. d.).
[32]	National Bank of Ethiopia Licensing and Supervision of Banking Business Proclamation No.84/1994 (1994). Minimum Capital Requirement for Banks [Online], available at http://www.nbe.gov.et
[33]	NBE, N. B. (2009/10). NBE, “Annual report”. Addis Ababa, Ethiopia.
[34]	Obari, L. (2015). The effect of asset liability management on profitability of commercial banks in Kenya a research paper, school of business, university of Nairobi.
[35]	Ongore, O. (2013). Determinants of Financial Performance of Commercial Banks in Kenya, International Journal of Economics and Financial, Issues Vol. 3, No. 1, 2013, pp. 237.
[36]	Owoputi J. (2014). Bank specific, industry specific and macroeconomic determinants of bank profitability in Nigeria. European scientific journal September 2014 edition vol. 10, no. 25 issn: 1857 – 7881 (print) e - issn 1857- 7431.
[37]	Ramlall, I. (2009). Bank Specific, Industry Specific and Macroeconomic Determinants of Profitability in Taiwanese Banking System: Under Panel Data Estimation, International Research Journal of finance and Economics.
[38]	Seblewongel L. (2017). Impact of Asset Liability Management on Profitability of Commercial Banks in Ethiopia Addis Ababa University Department of Accounting and Finance.
[39]	Sheela, P and Bastray, T. (2014). Effect of asset liability management on commercial bank profitability in Indian financial market. International Journal of Business and Administration, Vol. 1, Issue. 6, July - Sep, 2014. Soyibo et al, (1991).
[40]	Tabari N. (2013). The Effect of Liquidity Risk on the Performance of Commercial Banks International Research Journal of Applied and Basic Sciences.
[41]	Tamiru, B. (2013). Asset Liability Management and Commercial Banks Profitability in Ethiopia, Journal of Finance and Accounting.
[42]	The impact of asset and liability management on Profitability: An Analysis of Large Australian Firms (April 30, 2010). Melbourne Institute.
[43]	Uyemura, D. G. & Van Deventer, D. R. (2003). Financial Risk Management in Banking, McGraw-Hill, New York, NY.
[44]	Vossen B. (2010). A study on Bank Liquidity Management. University at Albany, State University of New York. Wooldridge. (2009). Introductory Econometrics: A modern Approach. South Western.
[45]	Westport, CT Anjili, D. A. (2014). Effects of asset and liability management on the financial performance of commercial banks in Kenya, School of Business, University of Nairobi.
[46]	Zenios, S. & Ziemba, W. T. (2007). Handbook of asset and liability management: Theory and Methodologies. North Holland.
[47]	Zopounidis, C. (2001). Multicriteria decision aid in financial management, European Journal of Operational Research, 119.

Cite This Article

Plain Text BibTeX RIS

APA Style

Roba, H. A., Legass, H. A. (2024). The Impact of Asset & Liability Management on Profitability: Evidence from Selected Private Commercial Banks in Ethiopia. International Journal of Finance and Banking Research, 10(6), 104-117. https://doi.org/10.11648/j.ijfbr.20241006.11

Copy | Download

ACS Style

Roba, H. A.; Legass, H. A. The Impact of Asset & Liability Management on Profitability: Evidence from Selected Private Commercial Banks in Ethiopia. Int. J. Finance Bank. Res. 2024, 10(6), 104-117. doi: 10.11648/j.ijfbr.20241006.11

Copy | Download

AMA Style

Roba HA, Legass HA. The Impact of Asset & Liability Management on Profitability: Evidence from Selected Private Commercial Banks in Ethiopia. Int J Finance Bank Res. 2024;10(6):104-117. doi: 10.11648/j.ijfbr.20241006.11

Copy | Download

@article{10.11648/j.ijfbr.20241006.11,
  author = {Hussein Abdulkadir Roba and Habtamu Alebachew Legass},
  title = {The Impact of Asset & Liability Management on Profitability: Evidence from Selected Private Commercial Banks in Ethiopia
},
  journal = {International Journal of Finance and Banking Research},
  volume = {10},
  number = {6},
  pages = {104-117},
  doi = {10.11648/j.ijfbr.20241006.11},
  url = {https://doi.org/10.11648/j.ijfbr.20241006.11},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijfbr.20241006.11},
  abstract = {This research meticulously investigates the intricate interplay between Asset and Liability Management (ALM) practices and the profitability dynamics of selected private commercial banks in Ethiopia over the period spanning 2011 to 2023. Employing a comprehensive fixed effect balanced panel regression analysis across a time horizon of 13 years and encompassing data from ten meticulously chosen banks, this study sheds light on critical aspects of financial management in the banking sector. Utilizing a quantitative approach and an explanatory design rooted in secondary data extracted from audited financial statements, the study rigorously examines a spectrum of key variables. These variables include income diversification, liquidity, bank size, GDP, asset quality, capital adequacy, loan and advance, and operational efficiency, all meticulously analyzed using E-view 12 econometrics software. The research findings underscore the pivotal significance of certain factors in enhancing bank profitability. Notably, asset quality, liquidity ratio, GDP, loan and advance, and bank size emerge as positive influencers on bank profitability, exhibiting statistically significant impacts. Conversely, operational efficiency and income diversification were found to exert negative effects on profitability. Surprisingly, capital adequacy was established as statistically insignificant in this context. This study accentuates the critical importance of asset quality, operational efficiency, liquidity management, bank size, GDP, income diversification, and loans as fundamental drivers of banks' return on assets. By accentuating the strategic significance of these variables, bank managers are equipped to navigate the complex financial landscape, leveraging effective ALM strategies to optimize profitability and ensure sustained financial viability.
},
 year = {2024}
}

Copy | Download

TY  - JOUR
T1  - The Impact of Asset & Liability Management on Profitability: Evidence from Selected Private Commercial Banks in Ethiopia

AU  - Hussein Abdulkadir Roba
AU  - Habtamu Alebachew Legass
Y1  - 2024/11/28
PY  - 2024
N1  - https://doi.org/10.11648/j.ijfbr.20241006.11
DO  - 10.11648/j.ijfbr.20241006.11
T2  - International Journal of Finance and Banking Research
JF  - International Journal of Finance and Banking Research
JO  - International Journal of Finance and Banking Research
SP  - 104
EP  - 117
PB  - Science Publishing Group
SN  - 2472-2278
UR  - https://doi.org/10.11648/j.ijfbr.20241006.11
AB  - This research meticulously investigates the intricate interplay between Asset and Liability Management (ALM) practices and the profitability dynamics of selected private commercial banks in Ethiopia over the period spanning 2011 to 2023. Employing a comprehensive fixed effect balanced panel regression analysis across a time horizon of 13 years and encompassing data from ten meticulously chosen banks, this study sheds light on critical aspects of financial management in the banking sector. Utilizing a quantitative approach and an explanatory design rooted in secondary data extracted from audited financial statements, the study rigorously examines a spectrum of key variables. These variables include income diversification, liquidity, bank size, GDP, asset quality, capital adequacy, loan and advance, and operational efficiency, all meticulously analyzed using E-view 12 econometrics software. The research findings underscore the pivotal significance of certain factors in enhancing bank profitability. Notably, asset quality, liquidity ratio, GDP, loan and advance, and bank size emerge as positive influencers on bank profitability, exhibiting statistically significant impacts. Conversely, operational efficiency and income diversification were found to exert negative effects on profitability. Surprisingly, capital adequacy was established as statistically insignificant in this context. This study accentuates the critical importance of asset quality, operational efficiency, liquidity management, bank size, GDP, income diversification, and loans as fundamental drivers of banks' return on assets. By accentuating the strategic significance of these variables, bank managers are equipped to navigate the complex financial landscape, leveraging effective ALM strategies to optimize profitability and ensure sustained financial viability.

VL  - 10
IS  - 6
ER  -

Copy | Download

Author Information

Hussein Abdulkadir Roba

Department of Accounting and Finance, College of Business and Economics, Madda Walabu University, Bale Robe, Ethiopia

Contact Email
Habtamu Alebachew Legass

Department of Islamic Economics and Finance (ISEFAM), Sakarya University, Serdivan, Turkey

Contact Email

http://orcid.org/0000-0002-7127-1719

Download PDF

Sections

Plain Text BibTeX RIS

APA Style

Roba, H. A., Legass, H. A. (2024). The Impact of Asset & Liability Management on Profitability: Evidence from Selected Private Commercial Banks in Ethiopia. International Journal of Finance and Banking Research, 10(6), 104-117. https://doi.org/10.11648/j.ijfbr.20241006.11

Copy | Download

ACS Style

Roba, H. A.; Legass, H. A. The Impact of Asset & Liability Management on Profitability: Evidence from Selected Private Commercial Banks in Ethiopia. Int. J. Finance Bank. Res. 2024, 10(6), 104-117. doi: 10.11648/j.ijfbr.20241006.11

Copy | Download

AMA Style

Roba HA, Legass HA. The Impact of Asset & Liability Management on Profitability: Evidence from Selected Private Commercial Banks in Ethiopia. Int J Finance Bank Res. 2024;10(6):104-117. doi: 10.11648/j.ijfbr.20241006.11

Copy | Download

@article{10.11648/j.ijfbr.20241006.11,
  author = {Hussein Abdulkadir Roba and Habtamu Alebachew Legass},
  title = {The Impact of Asset & Liability Management on Profitability: Evidence from Selected Private Commercial Banks in Ethiopia
},
  journal = {International Journal of Finance and Banking Research},
  volume = {10},
  number = {6},
  pages = {104-117},
  doi = {10.11648/j.ijfbr.20241006.11},
  url = {https://doi.org/10.11648/j.ijfbr.20241006.11},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijfbr.20241006.11},
  abstract = {This research meticulously investigates the intricate interplay between Asset and Liability Management (ALM) practices and the profitability dynamics of selected private commercial banks in Ethiopia over the period spanning 2011 to 2023. Employing a comprehensive fixed effect balanced panel regression analysis across a time horizon of 13 years and encompassing data from ten meticulously chosen banks, this study sheds light on critical aspects of financial management in the banking sector. Utilizing a quantitative approach and an explanatory design rooted in secondary data extracted from audited financial statements, the study rigorously examines a spectrum of key variables. These variables include income diversification, liquidity, bank size, GDP, asset quality, capital adequacy, loan and advance, and operational efficiency, all meticulously analyzed using E-view 12 econometrics software. The research findings underscore the pivotal significance of certain factors in enhancing bank profitability. Notably, asset quality, liquidity ratio, GDP, loan and advance, and bank size emerge as positive influencers on bank profitability, exhibiting statistically significant impacts. Conversely, operational efficiency and income diversification were found to exert negative effects on profitability. Surprisingly, capital adequacy was established as statistically insignificant in this context. This study accentuates the critical importance of asset quality, operational efficiency, liquidity management, bank size, GDP, income diversification, and loans as fundamental drivers of banks' return on assets. By accentuating the strategic significance of these variables, bank managers are equipped to navigate the complex financial landscape, leveraging effective ALM strategies to optimize profitability and ensure sustained financial viability.
},
 year = {2024}
}

Copy | Download

TY  - JOUR
T1  - The Impact of Asset & Liability Management on Profitability: Evidence from Selected Private Commercial Banks in Ethiopia

AU  - Hussein Abdulkadir Roba
AU  - Habtamu Alebachew Legass
Y1  - 2024/11/28
PY  - 2024
N1  - https://doi.org/10.11648/j.ijfbr.20241006.11
DO  - 10.11648/j.ijfbr.20241006.11
T2  - International Journal of Finance and Banking Research
JF  - International Journal of Finance and Banking Research
JO  - International Journal of Finance and Banking Research
SP  - 104
EP  - 117
PB  - Science Publishing Group
SN  - 2472-2278
UR  - https://doi.org/10.11648/j.ijfbr.20241006.11
AB  - This research meticulously investigates the intricate interplay between Asset and Liability Management (ALM) practices and the profitability dynamics of selected private commercial banks in Ethiopia over the period spanning 2011 to 2023. Employing a comprehensive fixed effect balanced panel regression analysis across a time horizon of 13 years and encompassing data from ten meticulously chosen banks, this study sheds light on critical aspects of financial management in the banking sector. Utilizing a quantitative approach and an explanatory design rooted in secondary data extracted from audited financial statements, the study rigorously examines a spectrum of key variables. These variables include income diversification, liquidity, bank size, GDP, asset quality, capital adequacy, loan and advance, and operational efficiency, all meticulously analyzed using E-view 12 econometrics software. The research findings underscore the pivotal significance of certain factors in enhancing bank profitability. Notably, asset quality, liquidity ratio, GDP, loan and advance, and bank size emerge as positive influencers on bank profitability, exhibiting statistically significant impacts. Conversely, operational efficiency and income diversification were found to exert negative effects on profitability. Surprisingly, capital adequacy was established as statistically insignificant in this context. This study accentuates the critical importance of asset quality, operational efficiency, liquidity management, bank size, GDP, income diversification, and loans as fundamental drivers of banks' return on assets. By accentuating the strategic significance of these variables, bank managers are equipped to navigate the complex financial landscape, leveraging effective ALM strategies to optimize profitability and ensure sustained financial viability.

VL  - 10
IS  - 6
ER  -

Copy | Download