In the literature, there are mainly two (Internal & External factors) and sometimes three (Macroeconomic, Industry specific, and bank specific factors) ways of classifying bank performance determinants. (Toddard et al., 2004; Panayiotis et al., 2005) 2.2.1.External Factors/ Macro-economic Factors Panayiotis et al. (2005), Afanasieff et al. (2002) stated that, macroeconomic policy stability, Gross Domestic Product, Inflation, Interest rate and political stability are believed to be the major macroeconomic factors that affect the performances of banks. According to Nassreddine et.al in Onuonga (2014), the external determinants of bank profits are related to both the economic and legal environments in which the banks operate. 2.2.2.Bank Specific Factors/Internal Factors Bank specific variables are variables that affect the profitability of a specific bank. These factors are within the scope of the bank and are easy to be manipulated and differ from bank to bank.
Financial Performance of Private Commercial Banks in Ethiopia: A CAMEL Approach201613 These include capital size, size of deposit liabilities, size and composition of credit portfolio, interest rate policy, labor productivity, state of information technology, risk level, management quality, bank size, ownership, etc. ( Zimmerman , 1996 ; Bourke, 1989; Wall, 1985 ) Andreas and Gabrielle (2009) stated that the bank profitability is usually measured by internal determinants which include bank specific variables. Athanasoglou et al, (2006) argued that profitability is a function of internal factors that are mainly influenced by a bank’s management decisions and policy objectives such as the level of liquidity, provisioning policy, capital adequacy, expense management and bank size, and the external factors such as ownership, market concentration and stock market development, and other macroeconomic factors. However, the main focus of this particular study is to investigate the impact of bank specific factors on banks profitability and there by rank the overall performance of the respective bank by using CAMEL model (bank specific) proxies. Needless to say, even though the main focus of this particular study is mainly confined to quantitative measure of bank specific variables; It should be properly noted that quantitative performance measurements by their nature are not comprehensive enough since they lack to incorporate qualitative elements such as monetary policy, regulation and supervision, financial sector openness, institutional environment, financial sector and non-bank, the management style and risk taking behavior of the bank itself. Any financial sector indicators lacking these qualitative elements could not be complete enough to capture the true level of the sector. (Creane, 2004) 2.3.Performance Measurement in Banks According to Aburime (2009), the importance of bank profitability can be appraised at the micro and macro level of the economy. At the micro level, profit is the essential prerequisite of a competitive banking institutions and the cheapest source of funds. It is not merely a result, but also a necessity for successful banking in a period of growing competition on financial markets.