THE EFFECT OF CREDIT RISK ON FINANCIAL PERFORMANCE: A CASE STUDY ON SOME SELECTED MICROFINANCE INSTITUTIONS IN ETHIOPIA

Abstract

This study attempts to reveal the relationship between credit risk and financial performance of micro finance institutions in Ethiopia. In order to investigate these study quantitative research approach is employed based on documentary analysis. A panel data from five selected micro finance covering the four-year period (2013-2017) is analyzed using SPSS software. The study used one dependent variable return on asset (ROA), four independent variables that are: non-performing loan to total loan and advance ratio (NPLTLA), loan provision to total loan and advance ratio (LPTLA), total loan and advance to total deposit ratio (TLATD) and the ratio of non-performing loan to loan provision (NPLLP) as measures of credit risk. Classical linear regression model were used to analyze the relationships of the depended variable with explanatory variables. Total loan and advance to total deposit ratio show positive and significant effect on micro finance institutions performance in Ethiopia. The research concluded that credit risk has effect on financial performance of micro finance in Ethiopia. Hence, the study recommend in support of each variable for micro finance institutions of Ethiopia should enhance their capacity in credit analysis and loan administration