THE IMPACT OF CREDIT RISK ON FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN ETHIOPIA

Abstract

The objective of the study is empirically to examine the impact of credit risk on financial performance in Ethiopian Commercial banks. This study presents the level of credit risk impact which is measured by loan to deposit ratio and provision against loan outstanding have on financial performance which is measured by return on asset and return on equity. It consider all the 17 commercial banks that currently operate in Ethiopia by considering their financial performance for five years from 2011-2015.The researcher used SPSS 20 for analysis and interpretation of data and regression to see the strength of relationship and correlation how strongly they are related. The results of the study implied that the independent variables have positive impact on the dependent variables. Through the period considered the loan to deposit ratio has the significant positive impact on return on asset and return on equity than loan loss provision. The thesis has seen the trends of the variables and in the period considered return on asset has shown the highest fluctuation. The researcher recommends that Bank should manage better their LDR ratio because as this ratio increases more and more, the bank becomes more and more risky as the loan amount would be equal or sometimes greater than the deposit amount. As a result banks suffer with a liquidity problem and that may also makes the bank risky