THE EFFECT OF CREDIT RISK MANAGEMENT ON PROFITABILITY OF ETHIOPIAN COMMERCIAL BANKS

Abstract

The purpose of this paper is to examine the effect of credit risk management on profitability of commercial banks of Ethiopia as measure by variables including loan loss provision to term loan ratio, capital adequacy ratio, ban size, total loans to total deposit ratio and total loans to total asset ratio for measuring the risk level of the bank while return on asset and return on equity are taken as proxies for profitability of the banks. The study undertakes ten years’ time series data for seventeen commercial banks which are currently under operation and analyze the data using SPSS version 25 software to identify the cause and effect of each variable described above. The findings of this study suggest that improving credit management, increases efficiency of asset management, and eventually increase commercial banks’ profitability in Ethiopian baking business. Therefore improvement in credit risk factors such as NPLs position, capital adequacy ratio has significant and positive effect on profitability of banks. Hence bank management and the regulatory body should make the necessary arrangement to regulate the banks NPLs and CAR position for the industry to be profitable.