The Effect of Credit Risk on Financial Performance of Ethiopian Private Commercial Banks

Abstract

The main objective of this study was to analyze the impact of credit risk on financial performance of Commercial private banks in Ethiopia. In order to accomplish these study quantitative approach was employed and a panel data from fourteen banks was used which covers the time period of 2013 to 2019. By using hausman test fixed effect model was selected as a best model and the analysis was done using Eviews software version 8. The study used return on asset as a dependent variable proxy of financial performance and loan loose provision ratio as a proxy of credit risk. Other control variables included are capital adequacy ratio, total deposit to total asset, real gross domestic product growth rate and inflation rate. To accomplish the study both descriptive and regression analysis specifically fixed effect model was used to analyze the relationship between dependent and independent variables. The findings of fixed effect regression result indicated that bank credit risk which is proxy by loan loose provision ratio have negative and significant impact on banks profitability proxy by return on asset. Capital adequacy ratio, total deposit to total asset, real gross domestic product growth rate inflation rate have a positive and significant impact on bank profitability which is proxy by return on asset. Banks size which is proxy by total asset is insignificant to affect banks profitability which proxy by return on asset. Accordingly, the researcher recommend that commercial banks’ policy makers and top managements need to strength their credit risk management capacity and fully anticipate the impact of real gross domestic product growth rate and inflation rate to maximize their profitability.