Determinants of Bank Profitability in a Developing Economy: Empirical Evidence from Tanzania

The aim of this study was to investigate the key determinants which influence banks’ profitability. The factors which determine banks’ profitability was categorized in to two, namely; internal determinants and external determinants. Variables which were chosen to represent internal determinants were; Liquidity risk, operating efficiency, credit risk, business mix, bank assets and capital adequacy. The variables which were used in this study representing external determinants were annual Gross Domestic Product growth rate and annual inflation rate. The data on the variables in regard to internal determinants were sourced mainly from banks’ annual reports for the period of seven years (from 2006–2012). The data on the variables in regard to external determinants were sourced mainly from International Monetary Fund website for the same period. Data were analyzed using SPSS software and multiple regression model was used to estimate the relationship between banks’ profitability and internal determinants and external determinants. The findings revealed that banks’ internal determinants especially capital adequacy, operating efficiency, liquidity risk, credit risk and bank size influence banks’ profitability and all banks’ external determinants (annual Gross Domestic Product growth rate and annual inflation rate) do not influence the performance of Tanzanian Commercial banks since their relationship with banks’ performance were not statistically significant. This study provides new additional information about Tanzanian commercial banking sector that will be used by policy makers in the future.