The Effect of Credit Risk Management on Banks’ Financial Performance in Ethiopia :The Case of Selected Private Commercial Banks in Addis Ababa City
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Date
2018-05
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Addis Ababa University
Abstract
The objective of this study was to analyze the impact of credit risk management on the financial performance of selected commercial banks and to establish if there exists any relationship between the credit risk management determinants of CAMEL indicators and financial performance (measured by return on equity) of commercial banks in Ethiopia. Explanatory research design was undertaken in this study and this was facilitated by the use of secondary data which was obtained from NBE. The study used multiple regression analysis in the analysis of data and the findings have been presented in the form of tables, graphs and regression equations. The study also found that there is a strong relationships between the CAMEL components and financial performance of commercial banks. This has been seen with values r squared being 75.5% implying that CAMEL components could explain 75.5% variations in financial performance of commercial banks in Ethiopia. The study also found that capital adequacy, asset quality and liquidity had weak relationship with financial performance (ROE) while management efficiency had moderate relationships with financial performance. Earnings had a strong relationship with financial performance. This study concludes that CAMEL model can be used as a representation for credit risk management and as proxy to measure financial performances of commercial banks in Ethiopia. Based on the management efficiency ratio, the study thus recommends that commercial banks should also try to keep their operational cost low as this negates their profits margin thus leading to low financial performance. This is depicted by the strong effect of earnings on financial performance. The ratio of capital adequacy revealed that the banks under the study reserved more money than required by the regulation. This implies that the banks were not offering credit to those in need and which in turn affects the profitability of the banks and shareholders as well.
Description
A Thesis Submitted to the College of Business and Economics on Partial Fulfillment of the Master of Business administration in Financial Management, Addis Ababa University
Keywords
Credit, Risk Management, Banks’ Financial Performance