Financial Risks and Profitability of Commercial Banks in Ethiopia

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Addis Ababa University


Commercial banks assume various kinds of financial risks which are related to the financial operation of a business and arise due to the uncertainty in movement of foreign exchange rates, interest rates, credit quality, and liquidity position. Risk may have positive or negative outcomes or may simply result in uncertainty. Therefore in order to increase the return, banks should know which risk factors have greater effect on profitability. Thus, this study examines the impact of financial risks on the profitability of commercial banks for a total of eight commercial banks in Ethiopia, covering the period of 2000-2011. To this end, the study adopts a mixed methods research approach by combining documentary analysis and in-depth interviews. The study reviews the financial records of eight commercial banks in Ethiopia and relevant data on macroeconomic factors considered. The findings of the study show that Credit risk and liquidity risk have a negative and statistically significant relationship with banks’ profitability. However, the relationship for interest rate risk and foreign exchange rate risk is found to be statistically insignificant. The study suggests that focusing in credit risk management and keeping optimal level of liquidity which enables banks to meet their contractual commitments could maximize return on assets of Ethiopian commercial banks



Financial risks and Profitability of Commercial banks in ethiopia