Understanding Bank Performance in Regional Economies : A Mixed-Methods Investigation of Financial and Operational Drivers with Implications for Sustainable Finance

Weldemichael, Zinabu Gebru and Tóth, Gergely (2026) Understanding Bank Performance in Regional Economies : A Mixed-Methods Investigation of Financial and Operational Drivers with Implications for Sustainable Finance. REGIONAL AND BUSINESS STUDIES, 18 (1). pp. 157-173. ISSN 2061-2311

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Abstract

This study examines the macroeconomic and internal drivers of bank profitability in the Ethiopian banking sector with the use of panel data from eight commercial banks from 2010 to 2023. Return on Assets (ROA) and Return on Equity (ROE) served as measures of performance, whereas explanatory variables included bank-specific determinants like loan to deposit ratio, bank size, loan growth, operating efficiency ratio, and capital adequacy ratio, along with macroeconomic determinants like GDP growth and interest rate. The analysis was conducted using STATA 17 with the random effects model being tested using the Hausman test. Results indicate that bank size and loan growth have a statistically significant and positive effect on ROA, highlighting that large banks could generate more earnings. On the other hand, the capital adequacy ratio was highly negatively associated with ROA and ROE, indicating the presence of a trade-off between profitability and financial safety. From the macroeconomic factors perspective, GDP growth has a positive effect on bank performance, while high interest rates have a negative impact on profitability by raising the costs of borrowing and reducing interest margins. Although the study attempted to integrate sustainable finance issues such as green lending, the lack of a regulatory framework and credible data within the Ethiopian banking sector made quantitative analysis impossible, revealing a fundamental gap in the financial system that necessitates urgent action to establish sustainable finance infrastructure. The study recommends that policymakers pursue regulatory reforms to enable ESG integration and promote sustainable banking practices, which can enhance profitability and align Ethiopia’s financial sector with international standards and trends.

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