Banking sector performance evaluation in Ethiopia for the period of growth and transformation plan (GTP-II): private vs public commercial banks

The main objective of this study was to evaluate and compare the financial performance of commercial banks in Ethiopia during the implementation of growth and transformation plan II. Moreover, determinants of financial performance were examined. The study was conducted using secondary data obtained from the National Bank of Ethiopia, and the official website of each commercial bank. Multiple panel regression and independent sample t tests were used to show the relationship and to compare the financial performance of commercial banks between the study periods. The ratio of non-interest expenses to total expense, log_net profit per employee, interest income to total income, and exchange rate were variables with a positive and significant effect on the financial performance of commercial banks, while log_total loans per branch and inflation affected negatively the financial performance measured by return on assets. Whereas, the ratio of debt to equity, log_net profit per employee, total liquid assets to total deposits, interest income to total income, and exchange rate have a positive and significant impact, while the ratio of loan loss provision to total loan, log_total loans per branch, and inflation negatively and significantly affected financial performance measured by ROE. The independent sample t test shows that except for the ratio of total loans to total deposits and total capital to total assets, the remaining variables did not show significant differences between state and publicly owned banks.


Introduction
Ethiopia's banking system dominates the country's financial sector.By channeling funds from surplus parties to parties with an investment idea, the banking sector contributes to the country's goal of growth and prosperity.The financial system which is the combination of both banks and nonbank is the lifeblood of any economy by mobilizing savings from surplus economic units to deficit economic units [1].Besides, it also ensures the efficient allocation of resources by channeling funds for different development projects.By doing so, they transfer funds from those with surplus funds to those that need them for productive activities which in turn stimulate investments and improve economic growth and development [2].
The banking sector's failures have many consequences on the economy, so the sector requires periodical investigation concerning their performances.Because of this reason, the Ethiopian government has been taking necessary measures to keep the efficiency and profitability of the banking sector on track.The major objective of a business organization is to maximize both the profit and wealth of its owners.Since the banking sector is known by profit-seeking business organizations, to act as an intermediation role, they have to be profitable.The pliability of the banking sector is even more important in transitional economies that are continuously restructuring their legal and macroeconomic environment to comply with the international policies introduced by the World Bank and International Monetary Fund [3].
Since April 25, 2018, the Ethiopian government is found to be in political reform which includes economic reforms.As economic reform, the banking sector obtained the necessary focus for the Ethiopian government since bank plays a vital role in the growth and development of the nation.Therefore, the regulatory bodies carried out various banking reforms to improve the performance of the sector.
FDRE 2016 [4] states that 'one of the major goals of the Ethiopian government during GTP-II is strengthening the financial sector intending to establish an accessible, efficient, and competitive financial system.In addition, the strategy in the financial sector will continue to be geared toward ensuring a favorable environment for the banking sector.This will help increase domestic savings to sustain rapid growth and provide the required resources for expanding and improving public services.Measures in reducing information asymmetry, strengthening the existing credit information-sharing system, encouraging the discipline of loan repayments, and creating internal dynamism will be pursued to foster efficiency and effectiveness in the financial sector.The financial industry is expected to finance huge projects both in the public and private sectors during GTP II' (P.110).
The Ethiopian banking sector is owned by both government and private sectors.Currently, there are sixteen privately owned, and two public-owned commercial banks operating in the country under the supervision of the National Bank of Ethiopia.Both structures of the banks ought to support the development goals that the country planned during GTP-II, particularly by financing the manufacturing industry to support the country's strategy to transform the economy from an agriculturally dominated to an industry lead economy.Besides, according to the GTP-II strategy, since the focus is given to support the private sector that invests in the export-oriented manufacturing sector, and in the tradable modern service sector, the financial services given to these activities need to be sufficient.
Different scholars conducted a study on the factors affecting the performance of banks in Ethiopia at different times.Recently [5] conducted a study on the financial performance of the Ethiopian banking sector by selecting seven private commercial banks using a simple random sampling technique and using six years (2005-2010) of financial data.The study found that between the study period, the banks showed a persistent increase in the volume of deposits, granting of the loan, and possession of assets throughout the study periods.Furthermore, the profitability of the banks revealed remarkable improvement during the study periods.[6] studied the determinants of Ethiopian commercial banks' performance between the study period of 1990-2012 taking return on assets (ROA) as a financial performance measurement tool and found that bank size and macroeconomic variables do not affect the banks' profitability, while the inflation rate has a significant effect on profitability measured by ROA.
The study conducted by [7] on financial performance analysis in the banking sector on selected commercial banks in Ethiopia for the years from 2007 to 2011 discloses that stateowned Commercial Bank of Ethiopia possessed the first rank in terms of assets management, while private-owned bank Awash International Bank and United Bank stands first in terms of profitability and solvency, respectively, between the study periods.
A recent study by [8] investigated the determinants of the financial performance of commercial banks in Ethiopia using panel data over the years 2003 to 2013 with a quantitative data analysis approach.The findings of the study reveal that, except inflation, all bank-specific, industry-specific, and macroeconomic variables have a significant impact on the financial performance of banks measured by ROA, while variables considered as independent significantly affect the financial performance of banks measured by NIM.Shanko et al. [9] examined factors affecting the profitability of the Ethiopian banking industry from 2010 to 2017.The finding of their study reveals that while loan and advance, current deposit, other liabilities, and gross domestic product have a statistically significant and positive relationship with banks' profitability, fixed deposit, and market concentration has a negative and statistically significant relationship with banks' profitability measured by ROA.In contrast, the impact of deposits with other banks, the sum of investment, saving deposits, and inflation is found to be statistically insignificant.
A recent study done by Leykun [10] conducted a study to examine factors affecting the net interest margin of commercial banks in Ethiopia from 2005 to 2014 by using pooled ordinary multiple regression models.The result of the study shows that capital adequacy, credit risk, operating costs, degree of competition, and deposit growth rate have a positive and significant effect on the financial performance of banks as measured by NIM.The study conducted by [11] to investigate the impact of bank-specific, industry-specific, and macroeconomic factors on the profitability of commercial banks in Ethiopia between the years of 2007 and 2016 using a random effect regression model shows that capital adequacy, leverage, liquidity, and ownership have a statistically significant and positive relationship with banks' profitability.Furthermore, operational efficiency, GDP, inflation, and interest rates have a negative and statistically significant relationship with banks' profitability.
The findings of the study conducted by Assfaw [12] to investigate the bank-specific factors which can affect the financial performance of private commercial banks in Ethiopia over the periods of 2011 to 2017 by using panel data of six private banks reveal that there is a positive and significant relationship between capital adequacy, management efficiency, and size of banks and financial performance of private commercial banks in Ethiopia measured by ROA, ROE, and NIM, while liquidity management has a negative and significant effect on ROE.Moreover, [13] found that, except for credit risk and management expense, all bank-specific factors have positive and significant effects on bank profitability.Besides, all of the macroeconomic variables, including economic growth, interest rate spread, and exchange rate, have statistically significant and positive relationships with banks' profitability.

Literature gap
As stated in the introduction, various scholars have conducted studies on the financial performance of Ethiopian banking sectors at various times.This study is unique because of the following reasons.First, as far as the researcher's knowledge, there are no significant studies conducted to compare private and state-owned commercial banks' performance throughout Growth and Transformation Plan II (GTP-II).Second, the financial statements used in this study were prepared and audited according to International Financial Reporting Standard (IFRS).There were no sufficient studies that used financial statements prepared according to the standards of IFRS.Therefore, in this study, the author tried to examine and compare the financial performance of private-and public-owned commercial banks in Ethiopia.Third, some of the variables used in this study were not applied in the previous studies to examine the financial performance of banking sectors.These variables are the efficiency ratio and national investment.Fourth, the direction of Zenebe [14] about future studies upon his conclusion of the first Growth and Transformation Plan I (GTP-I).
To sum up, to fill the above literature gap, this study tried to examine the financial performance of the banking sector measured by ROA and ROE.Both bank-specific factors such as capital adequacy, assets management, management quality, earning management, and liquidity management and macroeconomic variables like inflation rate, GDP, national investment, and exchange rate were applied as the determinant of the financial performance of the banking sector.Therefore, this study tried to investigate and compare the financial performance of private and state-owned commercial banks of Ethiopia throughout GTP-II (2016-2020).Consequently, the researchers intended to conduct a study on the title "Banking sector Performance Evaluation in Ethiopia for the Period of GTP-II: Private vs Public Banks.''

Objectives of the study
The main objective of the study is to evaluate the banking sector's performance for the period of GTP-II (2016-2020).Parallel with the main objective, the following specific objectives were devised to examine the performance of both private and public commercial banks in Ethiopia during the study period.These are:-• To compare the financial performance of state and privately owned commercial banks between the study periods.• To examine factors that affect the financial performance of banks in Ethiopia during Growth and Transformation Plan II.

Scope and limitation of the study
The research was carried out in Ethiopia using financial data from 2016 to 2020.In Ethiopia, this period was known as the Growth and Transformation Plan II (GTP-II) period.Between the study periods, both bank-specific and macroeconomic factors were examined for their impact on the financial performance of Ethiopia's banking sector.Macroeconomic factors that include GDP, annual inflation rate, national investment, and exchange rate were taken as independent variables, while capital adequacy ratio, debt to equity ratio, total loans to total assets, total loans to total deposits, loan loss provision to total loans, net profit per employee, the non-interest expense to total expenses, total loans per branch, total liquid assets to total deposits, total income to total assets, total interest income to total income, and cash to deposits were taken as bank-specific independent variables.Return on assets (ROA) and return on equity (ROE) were taken as dependent variables.Moreover, the main limitation of this study is the financial performance for the year after and before GTP-II was excluded from the study, and unpublished works were not included in the investigation Table 1.

Historical development of banking in Ethiopia
The history of banking in Ethiopia was back to the reign of emperor Minilik II.

Bank performance and its determinants
Performance in the banking industry can be expressed in different ways.Profitability, efficiency, and soundness are some of the tools that can be applied to measure banks' performance.Profitability can be measured using ROA and ROE, while overall efficiency can be observed using CAM-ELS, data envelopment analysis, and other tools.European Central Bank [15] states that 'Although banking institutions have become increasingly complex, the key drivers of their performance remain earnings, efficiency, risk-taking, and leverage.In detail: While it is clear that a bank must be able to generate "earnings," it is also important to take into account the composition and volatility of those earnings."Efficiency" refers to the bank's ability to generate revenue from a given amount of assets and to make a profit from a given source of income."Risk-taking" is reflected in the necessary adjustments to earnings for the undertaken risks to generate them (e.g., credit-risk cost over the cycle)."Leverage" might improve results in the upswing-in the way, it functions as a multiplier-but, conversely, it can also make it more likely for a bank to fail, due to rare, unexpected losses' (P.8.)

Pure expectations theory
The theory points out that the rising term structure of rates means the market is expecting short-term rates to increase.This implies the two successive years rate is higher than the single-year rate so that the rate should rise.The market is expecting that short-term rates will remain low or hold constant in future if the curve is flat [16].Besides, it is believed that a declining rate structure indicates it will continue to decline.The states that the expected return from holding long-term money or capital market investment until maturity is equal to the expected return from rolling over a series of short-term investments with a total maturity equivalent to that of the long-term investment [17].

The portfolio theory
One of the important theories concerning banking performance is portfolio theory which states that several factors such as the vector of rates of return on all assets held in the portfolio, a vector of risks associated with the ownership of each financial asset, and the size of the portfolio are the building block of asset diversification.This is to mean that portfolio diversification and the desired portfolio composition of commercial banks are the results of decisions taken by the bank management [16].

Materials and methods
The study used explanatory and descriptive research designs.
The first was used to examine the relationship between determinants and financial performance, and the later design was applied to describe the status of the banks during the study periods, respectively, Fig. 1.

Type of data, source, population, and sampling method
The study aims to examine the determinants of the performance of commercial banks in Ethiopia during growth and transformation plan-II.Besides, the performance of government-owned and private commercial banks was compared.
To achieve the stated objectives, a secondary type of data was used.The data were obtained from the National Bank of Ethiopia and the official websites of the banks under study.Moreover, private commercial banks with no sufficient audited financial data between the study periods were excluded from the investigation Table 2.The logarithm of national investment commercial banks measured by ROA, while the logarithm of total loans total branches and inflation have a negative and significant effect on the financial performance of banks measured by ROA.Table 5 reveals the regression result of model II.From the result debt to equity, loan loss provision to total loans, the logarithm of net profit per employee, interest income to total income, and exchange rate positively and significantly affect the profitability of commercial banks measured by ROE, while logarithm of total loans per branch, inflation and logarithm of GDP have a negative and significant effect on the profitability of commercial banks measured by ROE.

Regression result
The independent sample t test is used to decide whether the unknown means of two independent populations are varied.This implies the test compares the means of two independent populations and is used to check whether there is a significant difference between the means of two independent groups [20].The result of the independent sample test in Table 5 depicts that there is a significant difference between private and state-owned commercial banks concerning the ratio of total loans to total deposits (TLTD) and the ratio of total capital to total assets (TCTA).Besides, there is no significant difference between private and stateowned commercial banks with the rest of the performance measurement tools.

Conclusion
The main aim of this study is to examine the financial performance of both private and state-owned commercial banks in Ethiopia in the periods of the Growth and Transformation Plan (GTP-II) (i.e., 2016 to 2020).The financial sector of any economy requires maximum attention since it is the engine of economic sectors.The failure of this sector leads to the failure of any economy.In developing countries, the financial sector is dominated by banks, so it needs special care to save the economy from collapse.The Ethiopian financial sector is not unique from this since it is dominated by banks.In this study, the financial performance was measured by ROE and ROA.The econometrics result reveals that DER, LLP/TL, logNP/Employee, II/TI, and exchange rate have a positive and significant effect on the financial performance of commercial banks, while logTL/Branches, inflation, and log_GDP have a negative and significant impact on the financial performance of commercial banks measured by ROE.Besides, NIE/TE, log_NP/Employees, II/ TI, and exchange rate are the variables that have a positive and significant impact, while log_national investment, log_ TL/Branches, and inflation have a negative and significant impact on the financial performance measured by ROA.Moreover, the independent sample t test enumerates that there is a significant difference between state and privately owned commercial banks regarding the TLTD and TCTA.There were no significant differences between both banks concerning the remaining variables.Lastly, Table 6 shows that state-owned commercial banks revealed better performance between the study periods illustrated by a negative sign of the confidence interval column with 95% confidence level.

Recommendations
The dominance of banks in the Ethiopian financial sector is one of its distinguishing features.Failures in the banking sector lead to the demise of any economy.Therefore, continuous monitoring and support can protect banks from bankruptcy and improve their economic performance.That is why, during GTP-II, the Ethiopian government attempted to take the necessary measures to strengthen competitive and healthy financial institutions, particularly banks, resulting in improvements in operational efficiency and coverage during the study periods.World Bank [21] reported that over the last decade, Ethiopia's financial sector has been operating within a framework of financial repression used by the government to manage its monetary and foreign exchange policy, as well as to finance large infrastructure projects and state-owned enterprises (SOEs).The goal of this paper was to look at the financial performance of commercial banks in Ethiopia during the periods covered by GTP-II.The financial performance of state and privately owned commercial banks was compared, and factors influencing the financial performance of Ethiopian commercial banks were investigated.Based on the study findings, the managing bodies of privately owned commercial banks should have to endeavor to improve ROE, and CAR compared with state-owned commercial banks.Besides, to improve the state-owned banks' performance measured by ROA and NIM, drastic measures have to be taken.In general, the government must implement effective regulatory remedies to avoid a future financial crisis and its impact on critical policy issues.
growth rate has no significant effect on the financial performance of commercial banks.H oThe inflation rate has no significant effect on the financial performance of commercial banks.H o Exchange rate has no significant effect on the financial performance of commercial banks.H o National investment has no significant effect on the financial performance of commercial banks.H o Capital adequacy has no significant effect on the financial performance of commercial banks.H o Assets quality has no significant effect on the financial performance of commercial banks.H o Management efficiency has no significant effect on the financial performance of commercial banks.H o Earning quality has no significant effect on the financial performance of commercial banks.H o Liquidity position has no significant effect on the financial performance of commercial banks.
[5] banking business was started with the establishment of Abyssinia Bank in 1905 which was affiliated with the national bank of Egypt.The country established the State Bank of Ethiopia, which went operational on the 15th of April 1943 and has a status of a central and principal commercial bank with powers to issue banknotes and coins as an agent of the then Ministry of Finance and to engage in all commercial banking activities.[5]Since1964 private commercial banks were started to established and nowadays the number of banks including private commercial banks is 19.The following table depicts the name of banks, year of establishment, and affiliation:

Table 4
depicts the econometrics result of model I with a 5% level of significance.Accordingly, non-interest expense, the logarithm of net profit per employee, interest income to total income, the log of national investment, and exchange rate positively and significantly affect the profitability of

Table 2
Description of variables understudy

Table 3
Average financial ratios of commercial banks between the study periods

Table 4
Multiple regression result of model I