THE IMPACT OF CREDIT RISK MANAGEMENT ON THE FINANCIAL PERFORMANCE OF ETHIOPIAN COMMERCIAL BANKS

Abstract

The objective of the study is to examine the impact of credit risk management on the financial performance of Ethiopian commercial banks and to establish the relationship between the credit risk management determinants of CAMEL indicator financial performance, which was proxy by return on asset, of Ethiopian commercial banks. In order to achieve the objective of the study, quantitative research approach is employed based on documentary analysis. A panel data from six selected commercial banks covering the five-year period (2016-2020) is analysed using SPSS. The study used descriptive statistics, correlation analysis and regression analysis to examine the relationships of the depended variable with independent variable. The findings of the study have been presented in the form of tables, graph and regression equation. The result of the regression analysis found that there is a strong relationship between the CAMEL components and financial performance of commercial banks. This has been realised with the r-squared value of 80%, it indicated that 80% of CAMEL components can explain the variability of financial performance. Except management efficiency, all components of CAMEL are significant at 5% significance level as the p-values are less than the standard confidence level of 5%. The research concluded that CAMEL model can be used as a representation for credit risk management and as proxy to measure financial performances of commercial banks in Ethiopia and credit risk management has significant effect on financial performance of commercial banks in Ethiopia. Finally, the study recommended that as CAMEL components are well fitted to explain the variability in financial performance of commercial banks in Ethiopia, banks are highly advised to use CAMEL framework as their regular measurement tools and the values of CAMEL components tell how well banks are doing.