Determinants of Profit and Profitability of Rwanda Commercial Banks: A Profit Function Approach

Abstract

The banking literatures on profits and profitability of the bank(s) have used macroeconomic and bank specific performance indicators to predict the profit and profitability of bank(s). Other literatures in the banking research also emphasized with cost efficiencies to determine the profit and profitability. The present study employs the profit function approach by disaggregating the factors into input, output, risk, macroeconomic factors and social factors and examined these factors’ effect on profit and profitability of a commercial bank in Rwanda. The relevant data related to the variables are taken from the annual reports of the selected commercial bank for the period between 2001 and 2015. The findings reveal that the employee cost is most significant factor affecting the profit as well as profitability of the selected commercial bank in Rwanda. Followed by interest and non-interest income also contributes to the profit and profitability along with deposit per branch and risk factor namely credit to total assets.