THE EFFECT OF CREDIT RISK MANAGEMENT ON PROFITABILITY OF SELECTED COMMERCIAL BANKS IN ETHIOPIA

Abstract

This paper examines the relationship of credit risk management and the profitability of commercial banks in Ethiopia. In general it argues that credit risk management has relation (effect) on profitability of commercial banks of Ethiopia. To examine its relationship or effect level the researcher uses panel data regression models by taking ROA (dependent variable) and NPLR (independent variable) and others as control variables Capital Adequacy ratio (CAR), Loan to Deposit ratio (LTDR) and Bank size. The researcher took seven banks exclusively that have 17 year and above life span in Ethiopia, those are Awash international bank, Bank of Abyssinia, Commercial bank of Ethiopia, Dashen bank, Nib international bank, Wegagen Bank and United Bank. The random effect estimation technique is applied and the regression result indicates that credit risk management has negative and significant effect on commercial banks profitability. Based on the finding it is recommended that all commercial banks in Ethiopia manage their loans effectively and efficiently through risk identification and mitigation before granting loans to their profit.