DETERMINANTS OF CREDIT RISK MANAGMENT OF COMMERCIAL BANKS IN ETHIOPIA

Abstract

This study empirically examines determinants of credit risk of commercial banks in Ethiopia and interprets the result by relating with theories, related empirical reviews and the regulation. the study used balanced panel model in examine the regression model and collected the secondary data from purposively selected 10 commercial banks out of 17 commercial banks currently operating in Ethiopia covering the 10-year period 2009 to 2018 and National Bank of Ethiopia annual. Accordingly, model selection was done by Hausman test to determine the most suitable model to be used in this study and the result showed that Random Effect Model become appropriate. The study used one dependent variable credit risk (CR), five independent variables that are inflation (INF), GDP, capital adequacy(CAR), Bank size(BS), loan to deposit ratio (LTD) and profitability (ROA). The result of the study showed that, inflation and profitability has a negative and in significant influence on the credit risk. GDP, capital adequacy, Bank size, loan to deposit ratio (LTD shows positive and significant relationship with credit risk of commercial banks in Ethiopia. The study recommends that commercial banks managers employ a more flexible approach to dealing with the macroeconomic factors: such as with inflation, an increase in the loan loss provision was recommended when there was low inflation and a decrease in loan loss provision in cases of high inflation rate. The empirical result showed that the lagged nonperforming assets (credit risk) had a strong and statistically significant positive influence on the current non-performing assets (credit risk). The study reveals that both macroeconomic, and bank specific factors play crucial role in determining the credit risk of the commercial banking sector in Ethiopia.