Abstract
The objective of the study was to empirically examine the impact of credit risk on profitability of commercial banks in Ethiopia. For the purpose secondary data collected from 8 sample commercial banks for a 12 year period (2003-2004) were collected from annual reports of respective banks and National Bank of Ethiopia. The data were analyzed using a descriptive statics and panel data regression model and the result showed that credit risk measures: non-performing loan, loan loss provisions and capital adequacy have a significant impact on the profitability of commercial banks in Ethiopia. The study suggested a need for enhancing credit risk management to maintain the prevailing profitability of commercial banks in Ethiopia. Key words: Commercial banks, credit risk, Ethiopia, panel data regression performance, profitability.
Highlights
Management of trade of between risks and return is important for sustainable profitability of banks and other financial institutions
As stated in research design and methodology section, the study used two models to estimate the quantitative effect of credit risk measuring variables (NPLR, loan loss provision ratio (LLPR), capital adequacy ratio (CAR) and loan to deposit ratio (LTDR)) on profitability of commercial banks in Ethiopia measured by return on asset (ROA) and return on equity (ROE)
Previous studies in Ethiopia were very few and studies in general were inconclusive. Motivated to fill this gap a descriptive statics and panel data regression analysis were employed on secondary data collected from 8 commercial banks for a 12 years period (2003-2012)
Summary
Management of trade of between risks and return is important for sustainable profitability of banks and other financial institutions. Among risks in banking operation credit risk which is related to substantial amount of income generating assets is found to be important determinant of bank performance. Credit risk management capability of a bank remained a live academic discourse in finance and economics. Credit risk has been defined from different perspectives by different researchers and organizations. Most researchers agreed with the definition given by Basel (1999) who defines it as the potential that debtor or counter party default in satisfying contractually predetermined obligation according to the agreed up on terms. Because failure of trading partner to repay its debt in full can seriously damage the affair of the other partner, credit risk always has been the vicinity of concern throughout the world (Achou and Tenguh, 2008)
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