EFFECT OF CREDIT RISK ON PROFITABILITY OF PRIVATE COMMERCIAL BANKS IN ETHIOPIA

Abstract

The objective of the study is to empirically examine effect of credit risk on profitability of private commercial banks in Ethiopia by considering variables related to lending activities to determine bank specific, industry specific and macro-economic factors that affect banks financial performance over the period of 9 years (2009-2017). The empirical investigation uses the accounting measure of Return on Equity (ROE), which is the explained variable, to represent Banks’ performance while seven independent variables have been taken as explanatory variables. Secondary data are used for nine banks which stayed in the industry for more than nine years among sixteen private banks which are functional at the moment in Ethiopian banking industry. Data used for this analysis is obtained from banks’ annual reports, NBE annual reports and Ministry of Finance and Economic Development. To this end correlation and multiple regression analysis is done with fixed effect model and EView 9 software used to regress the data. NPL,LTDR,GDP,EXRA and DEPG had a significant impact on banks’ profitability at 10% significant level. LTDR,DEPG has a negative relationship with profitability and the rest has a positive relationship.