IMPACT OF CREDIT RISK MANAGMENT OF THE PERFORMANCE ON COMMERCIAL BANKS IN ETHIOPIA

Abstract

The objective of the study is to empirically examine the impact of credit risk management on the performance of commercial banks in Ethiopia, over the period of ten years (2009-2018). The empirical investigation uses the accounting measure of Return on Assets (ROA), which is the dependent variable, to represent Banks’ performance while non performing loan capital adequacy, liquidity ratio, loan advance and bank size have been taken as explanatory variables independent variables to represent credit risk management . To this end linear regression models is used to measure the relative weighting of the independent variables on the banks performance (ROA). A non probability method in the form of judgmental sampling technique is employed in selecting the eight Banks into the sample and the data are sourced from the annual reports of the same banks which account for over eighty percent of the total loan and advance in the industry. The study finds that the selected variables: the capital adequacy, liquidity, loan growth and bank size have significant effect on the performance of private banks. However, a certain variation in the magnitude and direction of their effect on the selected profitability measure, Return on Asset. Based on this study it is recommended that Ethiopia banks need to develop their credit risk management capacity, there should be control over head cost related to lending and increasing loan book size without compromising the sound credit planning should be apriority task.