The Effect of Credit Risk Management on The Financial Performance of Commercial Banks: The Case of Selected Private Commercial Banks In Ethiopia
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Date
2026-01-01
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A.A.U
Abstract
Commercial banks play a vital role in economic development through financial intermediation.
However, lending activities expose banks to credit risk, which is the most dominant risk in
banking. The primary objective of this study is to examine the effect of credit risk management
on the financial performance of private commercial banks in Ethiopia. The study used secondary
data collected from the audited annual reports of thirteen purposively selected private
commercial banks for a period of ten years from 2015 to 2024, for a total of 130 observations.
In the study, a quantitative research methodology was adopted with the use of the purposive
sampling technique and exploratory research design. The data were analyzed with the EView 12
software in a random-effect regression model. ROA was used as the dependent variable to proxy
financial performance. The independent variables considered were NPLR, CAR, LDR, LLPR,
LTAR, CER, CIR, and LG. The study found that the capital adequacy ratio (CAR), loan-todeposit
ratio (LDR), and credit interest income ratio (CIR) positively influence the return on
asset (ROA). On the other hand, non-performing loans ratio (NPLR), loan loss provision ratio
(LLPR), loan to total asset ratio (LTAR), and cost efficiency ratio (CER) negatively and
significantly influence the return on asset (ROA) of the private commercial banks in Ethiopia.
Additionally, found that loan growth (LG) had a positive but statistically insignificant effect on
the profitability of private commercial banks in Ethiopia during the study period. The study
concluded that credit risk management plays an important role in improving the financial
performance of the private commercial banks in Ethiopia.
Keywords: Credit Risk Management, Financial performance, Return on Asset