Determinants of commercial banks’ profitability evidence from banking industry in Uganda

Profitability measures the firm’s ability to generate revenue in excess ofexpense an accomplishment that is necessary if the firm is to be considered a going concern. Therefore, the indicators of the profitability are the profits made by the business, the growth and expansion, cost of the operation incurred and demand for goods and services in excess of return over cost economies of scale market power and cost conmol. A previous study examined the profitability of Kenya’s top six commercial banks and showed that the major important determinants of the profitability of the top six commercial banks were operating expenses, ownership, capital strength, bank size and ratio of loans. This study built on the fact that the mean profits for domestic, commercial banks are declining compared to the foreign commercial banks. The study found out that the factors affecting the performance of domestic commercial banks in Uganda are: management efficiency, capital adequacy, inflation, and asset quality and interest income. Further, the detenninants of Commercial Banks profitability depend on the relationship between capital adequacy, operational costs and bank size. This empirical study showed that Central Bank Rate, Operational Costs and Capital Adequacy significant ly affect the profitability of commercial banks in Uganda. However, the effect of bank size on the profitab ility of commetcial banks is not so strong thus more effort has to be put on internal bank specific factors to enhance performance and profitability. It is important for a bank to understand the source of its winds and the costs associated with the funds.