Risk Management and Its Impact on Financial Performance of Commercial Banks in Ethiopia
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Date
2015-06
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Addis Ababa University
Abstract
Risk management has become an important topic for financial institutes, especially
since the business sector of financial services is related to conditions of uncertainty.
The turmoil of the financial industry emphasizes the importance of effective risk
management procedures. Consequently, this thesis studies “Risk management and its
impact on performance in Ethiopian Commercial Banks.” The aim of this paper is
therefore to identify the impact of risk management and its impact on bank
performance on the Ethiopian bank performance . Balanced fixed effect panel
regression was used for the data of eight commercial banks in the sample covered the
period from 2002 to 2013. Four risk management variable that affects banks
performance were selected and analyzed. The results of panel data regression
analysis showed that credit risk management indicator (NPLR), Liquidity risk
management indicator(LIQR) and operational risk indicator (CIR) had negative
and statistically significant impact on banks performance .Capital adequacy ratio
had positive statistically insignificant impact on banks performance. In addition to
this the study is also analysis of primary data by descriptive statistical tools and on
hypothesis testing using regression model. This leads the researcher to conclude in
the last section that banks with good risk management policies have a lower risk and
relatively higher return on asset. Finaly None performing loan ratio, liquidity ratio
and cost to income ratio are significant key drivers of performance of commercials
banks in Ethiopia. Indeed focusing and reengineering the institutions alongside these
indicators could enhance the profitability as well as the performance of the
commercialbanksinEthiopia.
Key Words; Bank Performance, Risk Management, Liquidity Risk, Credit Risk
Operational Risk
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Keywords
Bank Performance; risk management; liquidity Risk; credit risk operational risk