Factors Affecting Credit Risk on Ethiopian Commercial Banks: Dynamic Panel Data Models
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Date
2024-06-08
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A.A.U
Abstract
Low follow up after disbursement of the loans and weakness of identifying key costumers which were arise bank- specific factors by bank’s risk management team. Also, financial or economic crises may make the banking sector exposed to high credit risks, which may lead to high levels of default. Furthermore, the high level of debt burden ratio may make customers unable to pay their financial obligations, thus increasing credit risks. The current study is in line with this and aims to examine the determinants of the nonperforming loans (NPLs) in Ethiopian banking sector. To that effect, we consider internal factors that include bank-specific variables, and external factors that involve bank-specific and macroeconomic variables. We estimate a dynamic panel data model by the system Generalized Method of Moments (GMM) for a set of 13 Ethiopian commercial banks based on annual data covering the period from 2010 to 2022.
The finding revealed that for which the importance of bank-specific factors in explaining the NPLs ratio. In actual terms, there were significant and positive linkages between the one-period lagged NPLs ratio, cost efficiency ratio return on equity (bank performance) and the capital adequacy ratio on the one hand, and the NPLs ratio on the other hand, and significant and negative linkages between the bank size, loan growth rate, loan deposit ratio and the NPLs ratio.The study provides important recommendations for bank decision makers in the Ethiopian commercial banks. Indeed, they should work on improving the operational efficiency and enhancing credit risk management and risk management in the banking sector, developing the operational framework for the monetary policy of central banks, enhancing the opportunities to benefit from the credit information industry, boosting the government's role in adopting economic policies that support investment, developing stress tests for banks, and adopting early warning systems.