Financial Risks and Profitability of Commercial Banks in Ethiopia
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Date
2013-11
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Addis Ababa University
Abstract
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
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Financial risks and Profitability of Commercial banks in ethiopia