Abstract
This research study purposed to determine the relationships between credit risks and the performance of commercial banks in Tanzania. Generally, the study aimed to establish the relationship between credit risk and financial performance in Tanzanian Banks. Specifically, to determine if the long-run relationship between credit risk and performance existed and investigated if credit risk and financial performance existed with a causal relationship in Tanzanian Banks. The research collected secondary data samples of 15 commercial banks in Tanzania from 2005-2019. This study adopted an explanatory approach to fulfil the above objectives. Both fixed and random effects models were engaged to determine the relationship. Hausman Test executed to determine the appropriate model. In the model, NPLR, LLPR, CAR, and BAS were used as the credit risk proxies, while return on asset (ROA) was used as the dependent variable. The findings reveal that the credit risk has both negative and positive relationships with the proxies used. The performance was inversely significant with NPLR and negatively insignificant with LLPR, while positively significant with CAR and positively insignificant with LBAS. The study concluded that the credit risk proxies, i.e., there was a significant relationship between NPLR and CAR with the commercial banks’ performance in Tanzania. Furthermore, the researchers concluded that the long-run relationship existed on the variables in the study, while granger causality existed in all variables except LLPR, i.e., Credit risk proxies except LLPR can granger cause the performance of commercial banks while the granger causality reveals no causal relationship among independent variables themselves. The study recommended that commercial banks in Tanzania should put more emphasis on handling credit risk and management of capital adequacy so as to have better financial performance.
Highlights
Banks are usually exposed to more than a few types of risks
The findings revealed that credit measures, i.e., LLP, NPL, and Capital Adequacy Ratio (CAR) have a significant relationship with the profitability of commercial banks in Ethiopia
return on asset (ROA) ranges from a minimum of -0.0406 to a maximum of 0.092 and a small standard deviation of 0.017, leading to the conclusion that the performance between the commercial banks in Tanzania is almost comparable
Summary
According to (BOT, Risk Management Guidelines, 2010), the six most common risks in the sector of banking will be covered by these guidelines such as liquidity risk, credit risk, market risk, operational risk, strategic risk, and compliance risk. To understand the researchers’ knowledge, there are few previous research that has been done in Tanzania’s banking sectors on the correlation between credit risks and financial performance. The few mentioned research imply that there was no exact conclusion that had been drawn on the link between credit risk and financial performance; the motivation of the research is to fill this gap in the literature. The study covered the research gap and answered the questions below
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