Effect of Credit Risk Management and Profitability in Ethiopian Microfinance institutions
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Date
2024-06-02
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A.A.U
Abstract
The study's goal is to quantitatively investigate the impact of credit risk management on the profit of
microfinance institutions in Ethiopia. The study's credit risk ratio indicators are Portfolio at risk
(PAR> 30 days), Write-off ratio (WOR), Risk coverage ratio(RC), Capital asset Ratio(CAR), and
Deposit loan ratio(DLR) are used as independent variables to measure the amount of credit level of the
MFIs. The study's proxies for profitability is ROA. This was done by collecting data from 21
microfinance in Ethiopia for the period from 2011 to 2022 which was published by the Association of
Ethiopia Microfinance Institution (AEMFI) was used as the main sources of data. Descriptive statistical
methods including mean, maximum, minimum, and standard deviation were used to examine the
acquired data. Additionally, using STATA software, multiple linear regressions were utilized to
determine the effect of independent variables over dependent variables. From the Five proxies of credit
risk management, the findings reveal that, Portfolio at Risk > 30 Days & WOR have a significant effect
on ROA, While RC, CAR and DLR have an insignificant effect on ROA. Based on the study it is
recommended that MFIs need to adopt a rigorous credit risk management policy, develop their credit
risk control capacity, and establish sound and competent credit risk management departments. Further
research with a large sample size and additional indicators of credit risk management and performance
is also an interesting expansion for this research.