The Effect of Credit Risk on the Financial Performance of Commercial Banks: Evidence From Selected Private Commercial Banks In Ethiopia
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Date
2022-02-07
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A.A.U
Abstract
Banks are the biggest and foremost financial institutions that constitute the lion’s share of economic growth and development in both rich and poor countries around the world. To realize this, they need to maintain stable, continual and reliable financial performance through mitigating any form of risk in general and credit risk in particular since credit risk has profound effect bank profitability. As a result, the basic purpose of this investigation was to analyze the relationship between credit risk and bank profitability and recommend possible solutions. Accordingly, a ten year data (2011-2020) from seven sample private commercial bank’s secondary data were taken and analyzed. The result of econometrics regressions revealed that at 95% confidence interval credit risk measures (included in this study capital adequacy ratio, nonperforming loan ratio and loan loss provisions) have significant effect on performance measure return on equity keeping bank size constant. Eventually, the findings of the research concluded that significant correlation is existed between credit risk and bank profitability. Hence, the study has recommended that banks regarding to these predictive factors, need to develop efficient credit administration strategy to maintain trustful financial performance.