Evaluating the Effectiveness of Credit Risk Management Practices in Ethiopian Private Banks: A Case Study on Selected Banks
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Date
2025-09-23
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AAU
Abstract
This study aims to evaluate the effectiveness of credit risk management (CRM) practices in
Ethiopian private commercial banks, using the Basel II and Basel III frameworks as the
theoretical foundation. CRM effectiveness refers to how well a bank’s risk management
strategies specifically risk identification, risk measurement and analysis, risk mitigation, and risk
monitoring prevent loan defaults, minimize financial loss, and maintain a sound credit portfolio.
The Basel Accords, particularly the core principles outlined in Basel II and the enhanced
regulatory standards in Basel III, provide a comprehensive structure for assessing these
practices.
The study employed a descriptive research design and a mixed-methods approach, incorporating
both quantitative (survey) and qualitative (document analysis) methods. A sample of 164
participants was selected from a total population of 276 staff members working in credit and
credit risk assessment departments of five major Ethiopian private commercial banks. Systematic
and purposive sampling techniques were used to ensure relevance and representativeness.
Data were collected through structured questionnaires and supplemented by secondary data
from annual reports. Key performance indicators such as non-performing loan (NPL) ratios and
loan loss provision (LLP) ratios were used to objectively assess CRM effectiveness. Data
analysis was conducted using both descriptive and inferential statistics with the aid of SPSS
version 26.
The findings revealed that all four core components of CRM were highly implemented across the
selected banks. Regression analysis showed that these practices have a significant positive effect
on overall CRM effectiveness. The study concludes that aligning internal CRM practices with
internationally recognized frameworks like Basel II and III enhances financial stability, credit
performance, and risk governance. It recommends that Ethiopian private banks continuously
assess and improve their CRM strategies in line with Basel principles and real-world credit
performance indicators