A Thesis submitted to the department of accounting and finance in partial fulfillment for requirement of Degree of Masters Science in Accounting and Finance

The main objective of this study is to examine the effect of leverage on Ethiopian private
commercial banks’ profitability. For this purpose, from private commercial Banks engaged in
commercial banking activates ten private commercial banks was studied. The study covered nine
years’ period (2008/09-2016/17). The dependent variable was the return on equity (ROE) used to
measure the profitability. And the independent variables were the degree of operating leverage
and degree of financial leverage to measure the leverage of the institutions. To ensure the
accuracy of the result of the regression model used two control variables these were operational
efficiency and bank size. In order to address the main objectives of this study balanced panel data
was used. The panel data were obtained from the audited financial statements of ten private
commercial banks’ and National Bank of Ethiopia. The data were analyzed by using panel data
analysis techniques by using Eviews 8. The descriptive statistics and diagnostic tests were
discussed, followed by, regression analysis. Then, regression result indicates that, the degree of
operating leverage had positive and statistically insignificant impact, the degree of financial
leverage had negative and statistically significant impact on profitability of private commercial
banks. Moreover, operational efficiency also had negative and statistically strongly significant
relationship with profitability. Finally, bank size had statistically significant impact on
profitability. Therefore, private commercial banks could be increased income to improve
profitability since they are operating above breakeven point. They should also give due
consideration to manage their debt properly, increase loan and raise equity financing optimize
profitability.