Credit Risk Management and Profitability in Ethiopian Microfinance Institution
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Date
2015-11
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Addis Ababa University
Abstract
Microfinance institutions (MFIs) today are the largest financial institutions around the
world. However, they are facing risks when they are operating. Credit risk is one of the
most significant risks that microfinance institutions face, considering that granting credit
is one of the main sources of income in microfinance institutions. Therefore, the
management of the risk related to credit affects the profitability of MFIs. The aim of the
research is to provide stakeholders with accurate information regarding the credit risk
management of microfinance institutions with its impact on profitability. The main
purpose of the research is to investigate if there is a relationship between credit risk
management and profitability of microfinance institutions in Ethiopia.
In the research
model, ROE and ROA are defined as proxies of profitability while PAR>30 days, LLPR,
WOR & RC are defined as proxies of credit risk management. The research collects
data from 12 microfinance institutions in Ethiopia from 2003 to 2012 and formulates two
hypotheses which are related to the research question. A series of statistical tests are
performed in order to test if the relationship exists. The findings reveal that credit risk
management does have statistically significant effects on profitability of commercial
banks. Between the four proxies of credit risk management, LLPR & WOR have a
significant effect on the both ROE and ROA while PAR>30 days & RC have an
insignificant effect on both ROE and ROA.
Key words: Credit risk management, Profitability, microfinance institutions, PAR>30
days, LLPR, WOR, RC, ROA, ROE.
Description
Keywords
Credit risk management; Profitability, microfinance institutions; PAR>30 days; LLPR; WOR; RC; ROA; ROE.