The Impact of Credit Risk on Financial Performance of Banks in Ethiopia
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Date
2015-05
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Addis Ababa University
Abstract
This study aimed at examining the impact of credit risk management on profitability of banks
in Ethiopia. Other objectives included, to determine bank specific, Industry specific and macro-
economic factors that affect banks financial performance. The study used a secondary data for
eight banks which stayed in the industry more than eleven years among nineteen banks which
is functional at the moment in Ethiopia banking industry. Data to do the analysis is obtained
from banks annual report, National Bank annual report and MoFED. In this study correlation
and multiple regression analysis done with random effect model and EView software used to
regress the data. Return on equity was dependent variable while nonperforming loan, capital
adequacy, bank size, loan and advance to deposit ratio, inflation and GDP have taken as an
independent variables. As a result the study concluded that the credit risk which is measured
by nonperforming loan ratio had a significant inverse impact on banks financial performance
and capital adequacy also same impact on profitability. In addition, loan to deposit ratio and
bank size have a positive significant impact on banks financial performance. In general, Bank
Specific factors have a significant impact on banks profitability while external factors like
GDP, Inflation and interest rate spread had no significant impact on banks profitability.
Keywords: Credit Risk, Financial Performance, Bank Specific, Industry Specific,
Macroeconomic factors
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Keywords
Credit Risk, Financial Performance, Bank specific, Industry specific, Macroeconomic factors