Determinants of Financial Risks of Private Commercial Banks In Ethiopia
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Date
2017-02
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Addis Ababa University
Abstract
While financial risk is one of the major risks of banks that can affect the development of financial
system, identifying the determinants of this risk is crucial for the soundness of financial sector.
The main objective of this study is to find out determinants of financial risk in Ethiopian private
commercial banks covering a period of fifteen years (2001-2015) on six sample private
commercial banks using quantitative research approach. This study directly examined indicators
of financial risk in terms of credit risk and liquidity risk in an objective manner from a wide
range of variables. Bank specific and macroeconomic variables were tested for the two
dependent variables credit and liquidity risk models by using the balanced panel fixed effect
regression model. The findings of the study for credit risk model revealed that Loan to deposit
ratio (Liquidity), income diversification, non performing loan, real GDP growth rate and
inflation have significant positive impact on credit risk whereas return on asset found significant
negative impact on credit risk of Ethiopian private banks. The rest three bank specific variables
Loan growth, bank size and operating inefficiency had no significant effect on credit risk of
Ethiopian private banks during the test period 2001 to 2015.The regression result of the second
financial risk indicator liquidity risk revealed that capital adequacy ratio and Real GDP growth
rate have significant positive impact on liquidity risk whereas Banks age and Average Nominal
lending interest rate have significant negative impact on liquidity risk. Finally the result
indicates that return on asset, Tangibility and impaired loan have negative but insignificant
relationship with liquidity risk.
Key words: Financial risk, credit risk, Liquidity risk, Ethiopian Private Commercial Banks
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Keywords
Financial risk; credit risk; Liquidity risk; ethiopian Private Commercial banks