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Vol.10, No.10, 2018

Financial and Operational Performance of Banks: The Case of

Dashen Bank of Ethiopia
Saeid Mohammed (MBA)
Lecturer in Management , Samara University

Abstract
The survival of commercial Banks in economic environment is very dependent upon their good performance that
based on scientific investigation. As a result, its wellbeing and successful operation captures the interest of
different researchers and other professionals. The objective of this research is to analyze operational and the
financial performance of Dashen Bank. The data used in this study was entirely a secondary data. Financial ratio
Analysis has been used to address the scientific evidence in the evaluation of performance of Dashen bank. The
result of the study shows that Dashen bank has shown a good performance in operation and financial aspects by
measuring return on asset return on equity. The debt ratio analysis shows that slight increase of debit. This may
cause increase on depositing deposit by the clients. The operating expense ratio showed efficiency in bank cost
minimization strategy.

1. INTRODUCTION
1.1. Back ground of the study
In the dynamic globalized world, Commercial Banks plays an important role as financial mediators in the economic
development of the nation. Banks collect financial resources from individuals and organizations, and redistribute
it to others so as to have further benefit. The role of banks as part of financial service in the economy of a country
can be seen as a major resource allocator of a country. They play great role on transferring deposited money from
depositors to investors. Besides intermediary function, performance of banks has implications for economic
growth of nations. Poor banking performance may lead to banking failure and crises which have negative effects
on the economic growth (Dawit, 2016).Financial system is serving as back bone in a country and acts as good
facilitator for financial institutions. Financial institutions play vital role for the development and progress of
country's economy. Strong financial system promotes investment by financing productive business, mobilizing
savings, efficiently allocating resources and facilitating trade activities.
According Mukdad, (2015) commercial banks performance is evaluated for several reasons depending on
their objectives. An entity like a bank regulator, such as may need to identify and call attention to banks that are
experiencing chronic financial problems in order that they may fix them before they get out of control. Commercial
banks evaluate their performance over a given period and determine the efficacy and long term viability of
management decisions and goals so that they can alter the course and make changes whenever it is appropriate.
With a constant and routine monitoring of performance, underlying problems may remain invisible and lead to
financial failures further down the line.
Financial statements report both on a firms position and on its operations over some past period, however,
the real value of financial statements lies in the fact that they can be used to help predict future earnings and
dividends. From an investors standpoint, predicting the future is what financial statement analysis is all about,
while from managements standpoint, financial statement analysis is useful both to help anticipate future conditions
and, more important, as a starting point for planning actions that will improve the firm’s future performance.

1.2. Statement of the problem

Banks play a very determinant role in the healthy functioning of the economy. According to Muhabie, (2015)
banks can be challenged by different factors including individual bank characteristics which could be swayed by
the internal decisions of the management and the board and the wide-ranged external factors which are out of the
control of the banks. Banks performance can be evaluated in three ways namely; (1) The traditional method of
financial indices based on balance sheet and income statement analysis, (2) Parametric methods based on the
knowledge of production function and (3) Non-parametric methods that do not require production function
(Abdi,2010). The performance evaluation of companies is essential to provide information about company's
operating performance and its net worth. Knowing organizations competitiveness and potentials of the business
through financial statement analysis is useful for decision making for users of financial statement information
including; managers, creditors, stockholders, potential investors, and regulatory agencies (Teshome, 2016).
Examining the performance of commercial banks become important for their profitable survival. The survival
of commercial Banks in economic environment is very dependent upon their good performance that based on
scientific investigation. As a result, its wellbeing and successful operation captures the interest of different
researchers and other professionals. I wanted to conduct my research on performance of banks in the Ethiopian
financial sector. To the best of my knowledge, this issue is not well researched in Ethiopia. So, I want to contribute

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Vol.10, No.10, 2018

something in this area.

1.3. Objectives
1. To analyze the financial performance of Dashen Bank.
2. To evaluate operation performance of Dashen Bank.
3. To assess by laws of regulatory body the level financial and non-financial reporting.

2. LITERATURE REVIEW
2.1. Profile of Dashen Bank Share Company
Dashen Bank Share Company was established on September 20, 1995 by 11 shareholders with a capital of 14.9
million Ethiopian Birr. It started its service by opening 11 area banks in the capital Addis Ababa and other major
towns of Ethiopia. Currently Dashen bank has more than 90 branches (Rahel,2015).
Vision
“In as much as mount Dashen excels all other mountains in Ethiopia, Dashen Bank continues to prove unparalleled
in banking services”.
Mission
“Provides efficient and customer focused domestic and international banking services, by overcoming the
continuous challenges for excellence through the application of appropriate technology”.

2.2. Bank Performance Indicators

Better financial and operational performance is the ultimate goal of commercial banks. All the strategies designed
and activities performed are means to realize this objective. However, this does not mean that commercial banks
have no other goals. Commercial banks could also have additional social and economic goals. According to Awit,
(2016) studies made on performance of commercial Banks largely used Return on Asset, Return on Equity and
Net Interest Margin as a common measure. There are different accounting based measures for banks operation
performance. For instance, operating expense ratio.
Return on Equity (ROE)
ROE is a financial ratio that refers to how much profit a company earned compared to the total amount of
shareholder equity invested or found on the balance sheet. ROE is what the shareholders look in return for their
investment. A business that has a high return on equity is more likely to be one that is capable of generating cash
internally. Thus, the higher the ROE the better the company is in terms of profit generation. Khrawish, (2011)
explain that ROE is the ratio of Net Income after Taxes divided by Total Equity Capital. It represents the rate of
return earned on the funds invested in the bank by its stockholders. ROE reflects how effectively a bank
management is using shareholders’ funds. Thus, it can be deduced from the above statement that the better the
ROE the more effective the management in utilizing the shareholders capital.
Return on Asset (ROA)
According to Khrawish, (2011) ROA is also another major ratio that indicates the profitability of a bank. It is a
ratio of income to its total asset. It measures the ability of the bank management to generate income by utilizing
company assets at their disposal. In other words, it shows how efficiently the resources of the company are used
to generate the income. It further indicates the efficiency of the management of a company in generating net income
from all the resources of the institution. A higher ROA shows that the company is more efficient in using its
resources.
Operational Self-Sufficiency (OSS)
Operational self-sufficiency is the most basic measurement of sustainability, indicating whether revenues from
operations are sufficient to cover all operating expenses. As with the preceding measures of returns, OSS focuses
on revenues and expenses from the institution’s core business, excluding non-operating revenues and donations.
The breakeven point of OSS is 100%. The value of 1 (or 100%) and above for OSS variables shows that the
institutions are operationally self-sufficient but the value below 1 (or 100%) shows that they have not yet achieved
financial breakeven and also not sustainable.
Operating expense ratio
According to CGAP, (2009) operating expense ratio is the most generally used measure of efficiency. It indicates
administrative and personnel expense of the institution yield on the gross loan portfolio. Operating expense ratio
is the percentage of operating expense to average gross loan portfolio. It measures how the institution’s
management has been efficient in minimizing operating expenses at a given level of operation.

2.3. Laws of regulatory body the level financial and non-financial reporting
The National Bank of Ethiopia (NBE) as the country’s central bank was first established in 1963. On May 1991,
a new Monetary and Banking Proclamation No.83/1994 was enacted which reorganized the bank according to the
market-based economic policy so that it could foster monetary stability, a sound financial system and such other

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credit and exchange conditions conducive to the growth of the country’s economy (Zemenu,2015).
According to national bank of Ethiopia report, (2015) implementing good corporate governance practices in the
banking sector clearly facilitates the NBE’s most important goal of fostering monetary stability and a sound
financial system in the country. Thus, to enhance the achievement of such goals, the legislator has empowered it
with various powers, such as, the power to prescribe the requirements for eligibility of bank directors, managers,
and to reject the appointment of those nominees who do not satisfy its criteria; to ensure that banks have prepared
and publicized proper financial statements and they are adequately disclosed to the public; to regulate transactions
that could give rise to possible conflict of interest; to regulate the rights of shareholders and the amount of
shareholdings they can hold in a bank, and to regulate risk management in banks. Moreover, in order to give teeth
to the powers of the NBE, the law has empowered it to supervise compliance of rules by banks through onsite and
off-site supervision mechanisms and to impose various sanctions on a non-complying bank.
The Licensing and Supervision of Banking Business Proclamation No.84/1994 allows the private sector (but,
all owners should be Ethiopian nationals only) to engage in the banking and insurance businesses and it marks the
beginning of a new era in Ethiopia’s financial sector. Thus, after its enactment, there were increases in the number
of private banking and insurance companies in Ethiopia in general. In particular, there are currently more than 17
banks operating in Ethiopia including the Development Bank of Ethiopia. Besides, there are 14 insurance
companies operating in Ethiopia currently. There are some relevant laws in Ethiopia which deal with the issue of
related party and related party transactions. The main laws include the Commercial code of Ethiopia, the Income
Tax Proclamation No.286/2002 and the Credit Exposures to Single and Related Counterparties Directive
No.SBB/53/2012(Getachew,2013).
Generally, financial sector regulation has a number of purposes/objectives. For example, in addition to the
objective of ensuring the safety and soundness of the financial system, there are several other social and economic
objectives of financial sector regulation. Thus, especially after occurrences of several financial crises in many parts
of the world, there is a wider agreement on the need for regulation currently. But, there is still no agreement on
how to enforce the regulations. Though there cannot be a single answer on this issue of enforcement, some of the
possibilities include multiple oversight and broad system of checks and balances. It is clear that regulation in
general and multiple oversights in particular involves costs. But, it is also argued that the costs of regulation are
far less than the costs of mistakes or failure of intervention. In addition, it is stated that another possibility is to
ensure that the voice of those whose interests are likely to be hurt by failure are well represented in the regulatory
structures. It is further suggested that simple and transparent regulatory systems with limited regulatory discretion
may be more immune to regulatory capture and that in many circumstances the cost is far less than the benefit that
arises from regulatory certainty, especially in the financial sector (Getachew,2013).
According to Rao, (2016) information provided by firms includes financial and non-financial. In conjunction,
financial disclosure is as a deliberate release of financial information, whether numerical or qualitative, required
or voluntary or via formal or informal channels. This type of information is essential for investors to efficiently
allocate scarce resources and assess investment options. But, financial information disclosure is not sufficient for
decisions by firms’ stakeholders. As a result, disclosure of non-financial information has got attention due to
inadequacy of traditional financial information reporting to fulfill the need of stakeholders in assessing the
organizations. Mohammad et al., (2014) stated that a non-financial information disclosure is qualitative
information in the companies’ reports excluding financial statements and related footnotes.
The corporate annual report is considered a very important official disclosure vehicle since other disclosure
vehicles such as conference calls and interim reports can provide more timely disclosure. Corporate disclosure can
be divided into two broad categories, mandatory disclosure and voluntary disclosure. Mandatory disclosure is
information revealed in the fulfillment of disclosure requirements of statute in the form of laws, professional
regulations, and stock exchanges. Voluntary disclosure is any information revealed in excess of mandatory
disclosure.
The importance of corporate disclosure arises from being a means of communication between management
and outside investors and market participants in general. Demand for corporate disclosure arises from the
information asymmetry problem and agency conflicts between management and outside investors. Enhanced
corporate disclosure is believed to mitigate these problems (Harvey and Rajgopal, 2005).

3. RESEARCH METHODOLOGY
3.1. Research Design
Descriptive approaches is a technique used to organize and summarize a set of data in concise way; helps to identify
the general features and trends in a set of data and extracting useful information; and also it is very important in
conveying the final results of a study.

3.2. Data Source and Collection Methods

The data used in this study was entirely a secondary data only. As the aim of this study is to evaluate the

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consolidated performance analysis, an audited financial statement of Dashen bank which has been reported to the
National Bank of Ethiopia was used. Moreover; website, journals, annual and quarterly bulletins, newspapers, data
from books, publications, magazines; reports were used as the sources of secondary data.

3.3. Methods of Data Analysis

The data, audited financial statement reported to National Bank of Ethiopia, was coded and arranged in a way that
is simple for analysis. Secondly, the arranged data have been analyzed using different statistical tools of data
processing such as tables and percentages. Besides, techniques of financial analysis, such as ratio analysis have
been used to address the scientific evidence in the evaluation of performance of Dashen bank. The collected data
was organized in using percentage and tables to make it easy to analyze and interpret it. In this section of the
research is mainly focused in data analysis and interpretation from the data collected using the audited annual
financial reports of Dashen bank from year 2014 to 2016.

4. DATA ANALYSIS AND INTERPRETATION

In this part the data which was a secondary collected from website audited annual financial report of Dashen Bank.
Therefore, the data analyzed, discussed and indicated based up on the specific objectives and selected performance
indicators which affected Dashen bank Share Company.
The collected data were analyzed using different financial and operating performance indicators, and ratio
analyses were applied to evaluate the trend in performance of Dashen bank considered in this particular research.
The findings presented below are produced and analyzed from the audited financial statements of Dashen bank
reported to the National Bank of Ethiopia covering from the period of 2014 - 2016.

4.1. Return on Asset

Return on asset refers to what earning was generated from the invested assets. Return on asset gives an idea how
efficient management is using assets to generate profit. Sometimes return on asset; refers to as Return on
investment.
Return on Assets=
Table 1. Return on asset
Year 2014 2015 2016
Net profit after tax 712,484,276 729,133,970 727,049,906
total assets 21,962,202,063 24,763,885,516 28,576,433,848
ROA (%) 3.244 2.944 2.544
Source: Computed from annual reports (2014-2016 financial statements)
As it can be shown in the above table Dashen bank shows a good performance in 2014 than of the other year.
In 2016 the bank shows a poor performance as compared to other period (from 2014-2016). The reason is that the
result 2.54 % of return on asset is lowest result comparing to other years, the bank should investigate on it to
improve earnings from invested asset.

4.2. Return on equity

Return on equity is the amount of net income after tax as percentage of shareholders equity. Return on equity
measures company profitability with the money shareholders have invested.
Return on Equity = ′

Table 2. Return on equity

Year 2014 2015 2016
Net income after tax 712,484,276 729,133,970 727,049,906
Shareholders’ equity 2,597,625,196 2,923,893,980 3,357,826,341
ROE 27.4 24.94 21.65
Source: Computed from financial statement (annual report 2014-2016)
Table 2 shows that the bank performing a good performance in 2014, because in this year it achieve 27.4% return
on equity. But Dashen bank shows a poor performance in 2015 and 2016.

4.3. Debt ratio

It is a financial ratio measures the proportion of both long term and current debts with total assets. This debt ratio
indicates the ability of the firm to meet its liability with its total asset.
Debt ratio =

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Table 3. Debt ratio

Year 2014 2015 2016
Total liability 19,364,576,867 21,839,991,536 25,218,607,507
Total asset 21,962,202,063 24,763,885,516 28,576,433,848
Debt ratio 88.17 88.19 88.25
Source: Computed from financial statement (annual report 2014-2016)
In the above table 3 the debt ratios analysis shows that slight increase of debit from year 2014 to 2016. This
may cause increase on depositing deposit (saving) by the clients. The reason behind is; since the bank serves as
intermediate between the surplus unit with deficit unit the amount of deposited will be considered as a loan by the
surplus unit, therefore, there is an increase of depositing and profit might be that, as debt paid, the amount of
interest expense will be higher and the profit after tax will be decline.

4.4. Operating expense ratio

Operating expense ratio indicates administrative and personnel expense of the bank yield on the gross loan
portfolio. It measures how the bank management has been efficient in minimizing operating expenses at a given
level of operation.
Operating Expense Ratio =
Table 4. Operating expense ratio
Year 2014 2015 2016
Operating expense 614,246,913 870,841,024 1,012,750,921
Gross loan portfolio 9,429,628,139 11,333,085,838 12,478,656,382
OER 6.5 7.7 8.1
Source: From annual report (financial statements 2014-2016)
The lower the operating expense ratio will show efficiency in bank cost minimization strategy. The lesser the
ratio, all things being equal, the greater efficient the institution is. With this regard, Dashen bank attains lower
ratio 6.5% in the year 2014. From this, one can conclude that Dashen bank incurred almost 0.65 cents for
administration and personnel (operating) expense in turn to provide a 1 Birr average gross loan portfolio to its
customers in the year 2014.

4.5. Laws, financial and non-financial disclosure

Even though there is an attempt to deal with the regulation of related party in the banking sector under Directives
No.SBB/53/2012 in Ethiopia there are many gaps in this area. There is no clear provision defining related parties
to non-commercial banks as defined in the above directive. moreover, there is no clear definition for related party
transaction provided in the Directive. The directive simply tried to define related party. It should be clear that the
provision ofloan to related parties is only one type of related party transactions as clearly provided inIFASB
Statement No.57 and in other national accounting standards. On the other hand, disclosure requirement of related
party relationships and related party transaction is provided neither in the above directive nor in other laws in
Ethiopian financial sector. It simply provides for the reporting requirement. Furthermore, the review, approval or
ratification requirements in relation to related party transactions are not provided in it.
Besides, no clear sanctions are imposed in case when the rules on related party transactions are violated. In
addition, the victim of abusive related party transaction is not provided with clear legal remedies in the Ethiopian
financial sector. In conclusion, it could be argued that the regulation of related parties in the financial sector in
Ethiopia is given little attention. But, it should be mentioned that there are other relevant laws that deal with
different issues of regulation of related party transactions in Ethiopia found scattered here and there. Though, it is
good to come up with some provisions dealing with the regulation of related parties in banks, much remains to be
done to come up with clear and detailed provisions on related parties and related party transactions with respect to
banks, insurance companies and microfinance institutions in Ethiopia.

5. CONCLUSION AND RECOMMENDATION

The collected data were analyzed using different financial and operating performance indicators, and ratio analyses
were applied to evaluate the trend in performance of Dashen bank considered in this particular study. The study
concentrated on performance of financial sustainability and profitability and efficiency of Dashen bank over the
study period. To evaluate the Financial and operational performance, Return on Assets, Return on Equity, debt
ratio, operating expense ratio were used. Moreover, by laws, financial and non-financial disclosures were analyzed
qualitatively.
Dashen bank shows a good performance in 2014 than of the other years when we compare result of return on
asset. In 2016 the bank shows a poor performance as compared to other periods. on the other hand Dashen bank
showed a good performance in 2014 on regard of return on equity while poor performance in 2015 and 2016.

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Vol.10, No.10, 2018

The debt ratio analysis shows that slight increase of debit from year 2014 to 2016. This may cause increase on
depositing deposit by the clients. The operating expense ratio showed efficiency in bank cost minimization strategy.
The smallest the ratio, all things being equal, the more efficient the institution. From the result of the study one
can conclude that Dashen bank incurred almost 0.65 cents for administration and personnel (operating) expense in
turn to provide a 1 Birr average gross loan portfolio to its customers.
Though, it is good to come up with some provisions dealing with the regulation of banks, much remains to
be done to come up with clear and detailed provisions on related parties and related party transactions with respect
to banks in Ethiopia.

Recommendations
Based on the findings of the study the following recommendations are made by the researcher:
 Since return on assets and return on equity of Dashen bank greater than zero, it should perform on it to
move towards highest return and to get performance stability.
 Dashen bank should minimize operating expense ratios as there is possibility to do so.
 The requirements and the procedures of disclosure should be adopted in the regulation of related party
transactions in the Ethiopian financial sector. Moreover, there should be timely publication of related party
transactions and it should be easily accessible to all interested bodies.

REFERENCE
 Abdi, N., (2010); Financial Performance Evaluation; in the case of Awash international bank); Mekelle
University.
 Brigham, E.L. (2009), Financial Management Theory and Practice: 12th Edition, Illinois Pry den Press.
 Dawit f (2015), Determinants of commercial banks financial performance in Ethiopia.
 Getachew T.(2013),the regulation of related party transactions in the Ethiopian financial sector: with special
focus on Banks.
 Getachew R (2013), the regulation of related party transactions in the Ethiopian financial sector: with special
focus on banks.
 K.S Rao(2016), Disclosure practices and profitability of commercial banks in Ethiopia , International Journal
of Commerce and Management Research, Volume 2; Issue 8; August 2016; Page No. 76-80
 Khrawish, H. A. (2011), Determinants of Commercial Banks Performance: Evidence from
Jordan.International Research .Zarqa University,.Journal of Finance and Economics, Vol. 5(5), pp. 19-45.
 Muhabie M., (2015),Financial Statement Analysis of Bank Falah; Virtual University Pakistan, Pakistan.
 Mukdad. I, (2015),executive compensation structure, ownership and firm performance, journalfinancial
performance economics, 38, pp 163-184
 National bank report 2015
 Website of Dashed bank www.dashen bank
 Zemenu B. (2015),Corporate Financial Reporting and Disclosure Practices in Ethiopia.

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ANNEX

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