| Abstract: | This study through to the critical relationship between credit risk management and the financial performance of commercial banks in Ethiopia. Employing a quantitative approach and a ten-year panel data analysis, the research sheds light on how effectively managing credit risk can significantly impact a bank's financial health. The findings reveal that key credit risk management strategies, like maintaining strong capital adequacy and liquidity ratios, play a vital role in boosting a bank's return on assets (ROA). The analysis further exposes the detrimental effects of poorly managed credit risk. Non-performing loan ratios, indicative of borrower defaults, and wider interest spreads, potentially reflecting riskier lending practices, both exhibit a negative and statistically significant correlation with ROA. Interestingly, the study suggests that inflation has a negative but statistically insignificant impact on ROA, highlighting the importance of considering a broader range of factors beyond just traditional risk management practices. In conclusion, the study underscores the undeniable link between effective credit risk management and the financial well-being of Ethiopian commercial banks. By implementing sound credit risk management policies that prioritize strong capital adequacy, liquidity, and controlling non-performing loans, banks can pave the way for sustainable financial performance and contribute to a more stable financial system in Ethiopia. |
