THE EFFECT OF CREDIT RISK AND LIQUIDITY RISK ON FINANCIAL PERFORMANCE OF ETHIOPIAN PRIVATE BANKS

Abstract

Commercial banks becoming largest financial institution and credit suppliers in Ethiopia. They are growing tremendously in terms of number, size and profitability. However they are facing significant risks like credit and liquidity risks. The main objective of this study is to analyze the effect of credit risk and liquidity risk on the financial performance of Ethiopian private commercial banks. Financial data was collected from annual audited financial report of 16 private commercial banks of Ethiopia over the period of 2013-2017. The study adopted an explanatory research design and analyzed the panel data by using fixed effect multiple regression model. Based on this model, credit risk had negative and statistically significant effect on profitability and liquidity risk had positive and statistically significant effect on profitability. Both risks had significant impact on banks performance. This is, therefore banks should seek mechanisms to improve their risk management capacity efficiency and remain competitive in the market.