The Effect of Credit Risk on Financial Performance of Commercial Banks in Ethiopia
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Date
2018-02
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Addis Ababa University
Abstract
This study attempts to reveal the relationship between credit risk and financial performance
of commercial banks in Ethiopia. In order to investigate these study quantitative research
approach is employed based on documentary analysis. A panel data from six selected
commercial banks covering the ten-year period (2007-2016) is analyzed within the fixed
effects model on regression analysis and using E-view8 software. The study used one
dependent variable return on asset (ROA), four independent variables that are: nonperforming
loan to total loan and advance ratio (NPLTLA), loan provision to total loan and
advance ratio (LPTLA), total loan and advance to total deposit ratio (TLATD) and the ratio
of non-performing loan to loan provision (NPLLP) as measures of credit risk. Both
descriptive statistics and regression analysis specifically fixed effects model were used to
analyze the relationships of the depended variable with explanatory variables. The regression
result show that non-performing loan to total loan and advance ratio, loan provision to total
loan and advance ratio and the ratio of non-performing loan to loan provision show negative
and significant effect at 1% and 5% significance level on financial performance of
commercial banks in Ethiopia. However, total loan and advance to total deposit ratio show
positive and significant effect at 1% significance level on financial performance of
commercial banks in Ethiopia. The research concluded that credit risk has significant effect
on financial performance of commercial banks in Ethiopia. Hence, the study recommend in
support of each variable for commercial banks of Ethiopia should enhance their capacity in
credit analysis and loan administration.
Description
A thesis submitted to the department of accounting and
Finance (A.A.U) in partial fulfillment for the requirement of
The degree of Master of Science in accounting & finance
Keywords
Bank, Credit risk, Performance