named: capital adequacy, asset quality, management efficiency, earning quality, and liquidity management are important factors in determining the profitability of private commercial banks in Ethiopia. The coefficient of multiple determinants also indicates that 67.5% of the changes in profitability of private commercial banks in Ethiopia are caused by variables incorporated in the CAMEL model.
Financial Performance of Private Commercial Banks in Ethiopia: A CAMEL Approach201667 On the other hand, the level of understanding about CAMEL model in the targeted private Ethiopian commercial banks is very limited and the supervisory organ is not also practicing the model in its fullest (well-articulated) form as per the fact gathered during the study. Hence, neither the management members at the respective banks nor the practice in the supervisory organ are properly internalizing the benefits anticipated from the CAMEL model owing to lack of comprehensive knowledge about CAMEL rating and/or absence of clear and objective performance measurement practice. The findings also revealed that capital adequacy, asset quality, management efficiency, earning quality, are the major significant determinants of the profitability of the senior private commercial banks. The results also confirmed that improvement in capital strength, asset quality, management efficiency, and earning quality leads to higher profits. Moreover, despite the loose ends to subjective interpretation and the possibility of criticism of any type of ranking of commercial banks; the method of analysis (multi-dimensional ranking method using CAMEL model) still provides simplistic and user friendly version of complex data. Hence, evaluation of financial performance of the banking sector is an effective measure and indicator to check the soundness of economic activities of an economy. As a result, the overall financial performance of the respective banks using CAMEL model over the study period shows UNB, NIB, and BOA holding from first to third ranks respectively.
Financial Performance of Private Commercial Banks in Ethiopia: A CAMEL Approach201668 5.2RECOMMENDATION: Ethiopian commercial banks in general and private commercial banks in particular need to develop their credit risk management capacity in order to avoid poor performance of assets that mainly emanate from loans and advances so as to boost their profitability Banks are advised to equip their staffs with comprehensive knowledge about essence of CAMEL and CAMEL rating. Moreover, strong bond between banks and bank supervisors should be in place all the time. The Ethiopian commercial banks in general and Ethiopian private commercial banks in particular need to venture into non-traditional areas and generating income through diversified activities other than the core banking activities in order to enhance profitability and sustain growth.