THE EFFECT OF CREDIT RISK AND MACROECONOMIC FACTORS ON PERFORMANCE OF COMMERCIAL BANK OF ETHIOPIA

Abstract

This paper examines the effect of credit risk and macroeconomic factor on performance of Commercial Bank of Ethiopia. In general it argues that the performance of a bank is affected by internal and external factors. The objective of the study was to assess the effect of credit risk and macroeconomic factor on the performance of Commercial Bank of Ethiopia proxy by ROE, independent variables used to examine the cause and effect level of credit risk and macroeconomic factor were Cost per loan asset ratio (CLAR), Nonperforming Loan Ratio (NPLR), Capital Adequacy Ratio (CAR), Loan to Deposit Ratio (LTDR) as indictors of credit risk. Growth Domestic Product (GDP), Real interest rate (IR), Inflation (INF), Foreign Exchange rate (FXR) and Unemployment (UNEMP) as macroeconomic factors indictors. The study used a secondary data for the period 1990 to 2019 for thirteen (30) years. The data was collected from Ministry of Finance, World Bank data, CBE Annual Report and National Bank of Ethiopia (NBE). Time Series data regression model was used to analyze and interpret the data aided by EView8 software, the result showed that Capital adequacy and Interest rate have significant impact on ROE with a positive relationship with ROE; Cost per loan asset and Loan to deposit ratio have significant impact on ROE with a negative relationship and the other independent variable non-performing loan, GDP, Inflation, Interest rate, Foreign exchange rate and Unemployment has no significant relationship with ROE. The study recommended that the bank should strength their capital to improve its profitability in the industry: the bank should be nonaggressive lender to avoid the exposure of the bank to credit risk and they have to work hard on managing their expenses (costs) efficiently.