Effect of Credit Risk Management on Business Performance of Banks Operating in Ethiopia

Abstract

The main aim of this study was to identify the effect of credit risk management on profitability (business performance) of selected commercial banks of Ethiopia based on secondary data sources over the period of 2010-2021 G.C. The study employed a quantitative research approach with an explanatory research design. The result of regression analysis of the random effect model was applied to investigate the effect of explanatory variables on profitability.The finding of this study showed that capital adequacy has a positive and statistically significant effect on the financial performance of commercial banks in Ethiopia. Besides, variables like a loan to deposit ratio and loan provision ratio have a positive and statistically significant effect on the profitability of commercial banks. In opposite direction, non-performing loans, loan to total asset ratio, and cost per loan have a negative and statistically significant effect on ROA respectively.Apart from contributing to the body of existing literature on the effect of credit risk management on the financial performance of the banking sector, the study gives a guideline to both public and private banks in the world in general and Ethiopia in particular. It indicated that the financial performance of commercial banks can be improved by improving the credit risk management system.This study contributes by supporting that credit risk parameters such as loan to deposit ratio, loan provision, non-performing loan, loan to total asset ratio and cost per loan have a statistically significant effect on ROA respectively. Keywords: Credit Risk, Risk Management, Commercial Banks, Sidama ,Furra college DOI: 10.7176/RJFA/13-9-02 Publication date: May 31 st 2022