IMPACT OF CREDIT RISK MANAGEMENT ON PROFITABLITY OF PRIVATE COMMERCIAL BANKS IN ETHIOPIA

Abstract

The importance of strong credit risk management for building quality loan portfolio is of Paramount importance to robust performance of commercial banks as well as overall economy. Since a large chunk of banks revenue accrues from loans from which interest is derived, managing credit risk plays important role for their profitability. As a result, the author is motivated to do research entitled with “Impact of Credit Risk Management on Profitability of Private Commercial Banks in Ethiopia" basing that there is a gap while previous research papers were done on the topic in terms of variables assumed as well as a new directives were issued by National Bank of Ethiopia ( the Central Bank in Ethiopia) after the research papers. Accordingly, the objective of the paper was to examine the impact of credit risk management on profitability of private commercial banks in Ethiopia. Multiple regression model was used in order to identify relationship between independent variables (Loan Loss Provision to Total Loan, Loan to Total Asset, Total Deposit to Asset, Size of Deposit, Capital Adequacy Ratio, Liquid Asset to Total Asset) and dependent variable (Return on Asset).Ten consecutive years audited financial statement were used as a secondary data covering 2005-2014 G.C (Gregorian calendar) from each of the six selected privates commercial banks (Awash International Bank Share Company, Abyssinia Bank Share Company, Dashen Bank Share Company, Nib International Bank Share Company, United Bank Share Company and Wegagen Bank Share Company) using purposive sampling techniques. The finding revealed that credit risk management has a significant impact on the profitability of private commercial banks in Ethiopia; particularly the LLPR,CAR & LATAR were statistically significant impact on ROA showing that reducing the value of LLPR and increasing CAR & LATAR are crucial for generating profit for the banks. Therefore, management need to be cautious while setting up a credit policy including prudent lending through proper analysis together with regular monitoring that might not negatively affects profitability, and NBE has also be conscious while issuing directives related to credit in such a way that the directives should not affect their profitability.