Efect of Loan Portfolio on Financial Performance: evidence from Selected Private Commercial Banks in Ethiopia
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Date
2025-01-08
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A.A.U
Abstract
Lending portfolio means allocation of credit to different sectors, rather than focus on few sectors. Should
banks and Micro finance institutions engage in diversification or concentrate (focus) their credit portfolio is
a basic concern in banking industry. The objective of this research was to find out how Ethiopian
commercial banks' lending portfolios affected their bottom lines. From 2013 to 2023, 11 Ethiopian
commercial banks were sampled for the study's balanced panel data. The Ministry of Finance, each bank's
website, and the National Bank of Ethiopia provided the data. Explanatory research design and a
quantitative technique were used to accomplish the study's goals. The study's independent variables were
loan diversification as determined by the diversification index, bank size, equity ratio, non-performing loan,
loan to asset ratio, liquidity ratio, gross domestic product, and inflation rate, while the dependent variable
was the financial performance of the banks as determined by return on asset (ROA) and risk adjusted return
on asset (RAROA). The study employed a random effect model for risk-adjusted return on asset and a fixed
effect model for return on asset for data analysis. The empirical finding shows that bank-specific factors
(ROA and RAROA) play a significant role to affect Ethiopian banks’ financial performance. These factors,
which have a statistically significant and favorable impact on Ethiopian commercial banks' financial
performance, include the diversification index, bank size, equity ratio, and liquidity ratio. On the other
hand, the loan to asset ratio and non-performing loans have a statistically significant negative impact.
Macroeconomic variable such as GDP and inflation has insignificant positive effect. The study mainly
recommends that, to improve credit quality it is better to diversify loan to various sectors, because, it
minimized idiosyncratic risk and enhance financial performance. And,management bodies of commercial
Banks try to monitor credit risk by economic sector.