The Impact of Credit Risk on Profitability of Private Commercial Banks in Ethiopia

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Addis Ababa University


The objective of the study is to empirically examine the impact of credit risk on profitability of private commercial banks in Ethiopia. Considering variables related to lending activities to determine bank specific, industry specific and macro-economic factors that affect banks financial performance over the period of 14 years (2003-2016). The empirical investigation uses the accounting measure of Return on Equity (ROE), which is the explained variable, to represent Banks’ performance while nonperforming loan ratio, capital adequacy ratio, cost per loan asset ratio, bank size, and loan and advance to deposit ratio, inflation and GDP have been taken as explanatory variables. Secondary data are used for six banks which stayed in the industry more than fourteen years among sixteen private banks which are functional at the moment in Ethiopian banking industry. Data used for this analysis is obtained from banks’ annual reports, National Bank annual reports and Ministry of Finance and Economic Development. To this end correlation and multiple regression analysis is done with fixed effect model and EView 7 software used to regress the data. Nonperforming loan ratio, cost per loan asset ratio and capital adequacy ratio had a significant impact on banks’ profitability but inverse. In addition, loan to deposit ratio and gross domestic product have a positive significant impact on banks profitability. In general, bank specific factors and macroeconomic factor GDP have a significant impact on banks profitability while external factors inflation and interest rate spread had no significant impact on banks profitability.


A thesis submitted to department of accounting and finance College of business and economics for partial fulfillment of The requirements for the award of MSC degree in Accounting and finance


Bank, Credit Risk, Ethiopia, Financial performance