Abstract:
The main purpose of the study is to examine the effect of asset diversification on financial
performance of commercial banks in Ethiopia. The study covers 15 commercial banks using their
10 years audited financial statements from 2014-2023. The independent variables incorporated
in the study are cash, financial asset, loan and advance and fixed asset. The dependent variables
are both return on asset and return on equity. The study utilized quantitative research approach,
explanatory research design, simple random sampling technique and secondary source of data.
The study conducted Breusch and Pagan Lagrange multiplier test to determine whether random
effects are significant in panel data models. It also conducted Hausman-model specification test
to select whether fixed effect model or random effect model is appropriate for the data collected
and the result revealed that random effects model is consistent over fixed effects model. The
finding of the study revealed that cash and loan and advance are significant variables that
determine financial performance of commercial banks in Ethiopia. However, financial asset and
fixed asset are insignificant variables in the determination of financial performance of
commercial banks in Ethiopia. Cash has significant negative effect on financial performance of
commercial banks in Ethiopia. Loan and advance have positive significant effect on financial
performance of commercial banks in Ethiopia. Thus, commercial banks in Ethiopia should have
to minimize the amount of cash on hand and they should convert the excess cash on hand in to
investment.
