Research Proposal

Background of the Study
The banking system plays an important role in the modern economic world. Banks collect the
savings of the individuals and lend them out to business- people and manufacturers. Bank loans
facilitate commerce. The banks play an important role in the creation of new capital (or capital
formation) in a country and thus help the growth process. As an important segment of the tertiary
sector of an economy, commercial banks act as the backbone of economic growth and
prosperity by acting as a catalyst in the process of development.
To effectively compete in the market place banks manage their assets and liabilities taking into
consideration the risk level, earnings, liquidity, profit, solvency, the level of loans and deposits
to mitigate losses and thus improve profitability, Since Asset liability management plays a
critical role in risk management, it is imperative that banks recognize the asset liability
importance and apply effective risk management procedures.
Given the relation between the well-being of the banking sector and the growth of the
economy (Rajan and Zingales, 1998; Levine, 1998), knowledge of the underlying factors that
influence the financial sector's financial performance is therefore essential not only for the
managers of the banks, but also for numerous stakeholders such as the central banks,
bankers associations, governments, and other financial authorities. Knowledge of these factors
would be useful in helping the regulatory authorities and bank managers formulate future
policies aimed at improving the financial performance of the Ethiopian banking sector.
There are many aspects of the performance of commercial banks that can be analyzed.
This study focuses on the financial performance of commercial banks in Ethiopia. Aburime
(2008) observed that the importance of bank financial performance can be appraised at
the micro and macro levels of the economy. At the micro level, profit is the essential
prerequisite of a competitive banking institution and the cheapest source of funds. It is not
merely a result, but also a necessity for successful banking in a period of growing
competition on financial markets. Hence the basic aim of every bank management is to
maximize profit, as an essential requirement for conducting business.
At the macro level, a sound and profitable banking sector is better able to withstand
negative shocks and contribute to the stability of the financial system. Bank profits
provide an important source of equity especially if re-invested into the business. This
should lead to safe banks, and as such high profits could promote financial stability
(Flamini et al, 2009). Among the possible factors that have effect on commercial banks
financial performance, asset liability management (ALM) is the major one (Kosmidou, 2004).
Statement of the Problem
It is appropriate for institutions (banks, finance companies, leasing companies, insurance
companies, and others) to focus on asset-liability management when they face financial risks of
different types. According to Hester and Zoellner (1966), there is statistically significant
relationship between ALM and financial performance and they disregard the null hypothesis that
there is no relationship between them. The objective of ALM is not to eliminate risk. Rather, it is
to manage risks within a framework that includes self-imposed limits.
So far in Ethiopia, studies have not been done efficiently on this specific topic lately. Research
done by Seblewongel Lemma (2017) has highlighted the impact of Asset liability Management
on the profitability of Ethiopian Banks With variables influencing Profitability with relation to
ALM (asset liability management) targeted factors are capital adequacy, asset quality,
operational efficiency, liquidity, income diversification and bank size, their effect on Profitability
of commercial banks in Ethiopia. This study goes beyond these factors to show the effect of
ALM on the financial performance of commercial banks. This study also feels the gaps on how
to calculate the financial performance of the given firm. This leaves a wide knowledge gap that
this study seeks to fill in.
Research Objective
The general objective of this study is to assess the Effect of asset liability management on
financial performance of commercial banks in Ethiopia.
The Specific Objectives
 Examining the effect of bank size on the financial performance of commercial

banks in Ethiopia,
 To examine the effect of capital adequacy on the financial performance of
commercial banks in Ethiopia,
 The effect of liquidity on the financial performance of commercial banks in
Ethiopia,
 The effect of leverage on the financial performance of commercial banks in
Ethiopia, and
 The effect of operational efficiency on the financial performance of commercial
banks in Ethiopia.

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Research Proposal

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Background of the Study

The Specific Objectives

 Examining the effect of bank size on the financial performance of commercial

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