Determinants of Credit Risk of Commercial Banks in Ethiopia
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Date
2017-05
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Addis Ababa University
Abstract
This study empirically examines determinants of credit risk of commercial banks in Ethiopia and interprets the result by relating with theories , related empirical reviews and the regulations. The study used balanced panel model in examining the regression model and collected the secondary data from purposively selected 7 commercial banks out of 17 commercial banks currently operating in Ethiopia covering the 15-year period 2000 to 2014 and National Bank of Ethiopia annual.
Accordingly model selection was done by Hausman test to determine the most suitable model to be used in this study and the result showed that Random Effect Model become appropriate. The study used one dependent variable credit risk (CR), five independent variables that are inflation (INF), financial sector development (FSD), competition (CON), loan to deposit ratio (LTD) and profitability (ROA).
The result of the study showed that, inflation has a positive and significant influence on the credit risk. Financial sector development also shows positive and significant relationship with credit risk of commercial banks in Ethiopia.
The study recommends that commercial banks managers employ a more flexible approach to dealing with the macroeconomic factors: such as with inflation, an increase in the loan loss provision was recommended when there was low inflation and a decrease in loan loss provision in cases of high inflation rate.
There is a significant and negative inverse relationship between competition (CON), loan to deposit ratio and profitability with the credit risk of commercial banks in Ethiopia.
The empirical result showed that the lagged nonperforming assets (credit risk) had a strong and statistically significant positive influence on the current non-performing assets (credit risk).
The study reveals that both macroeconomic, industry specific and bank specific factors play crucial role in determining the credit risk of the commercial banking sector in Ethiopia.
Keywords: Ethiopia, Credit risk, Bank-specific factors, Industry-Specific factors, Macroeconomic variables.
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Keywords
Ethiopia, Credit risk, Bank-specific factors, Industry-Specific factors, Macroeconomic variables