DETERMINANTS OF CREDIT RISK: THE CASE OF PRIVATE COMMERCIAL BANKS IN ETHIOPIA

Abstract

The study was carried out to empirically examine bank-specific and macroeconomic determinants of Ethiopian private commercial banks’ credit risk using balanced 13-year (2010–2022) annual audited financial statements of 12 banks and macroeconomic data. The study employed an explanatory research design and a quantitative research approach. Using the purposive sampling technique, the study covers 100% of the population, which operated for full years during the study period. The study included five bank-specific variables: liquidity, return on equity, capital adequacy ratio, bank size, and loan growth, and three macroeconomic factors: real gross domestic product growth rate, annual inflation rate, and lending rate. A random effect model was used for the credit risk. The empirical result revealed that all bank-specific and macroeconomic variables except liquidity, bank size, and return on equity are statistically significant in determining the credit risk of Ethiopian private commercial banks. The study suggests that commercial banks should focus on implementing risk-adjusted capital allocation, macro-prudential risk analysis, advanced credit scoring, and diversification of loan portfolios to manage credit risk effectively and maintain financial stability in evolving economic environments.