Assessment on the Effectiveness of Stress Testing in Commercial Bank in Ethiopia

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Addis Ababa University


The main objective of the study is to assess the effectiveness of stress testing as an instrument of risk mitigation in commercial banks in Ethiopia. To this end, the study adopts mixed research approach and descriptive methods to enable the researcher to describe current effectiveness of stress test practice as one of strategic means in mitigating risks in commercial banks. The type of data used was both primary and secondary as the research design employed was mixed-mode (qualitative and quantitative). As the study was conducted at institutional level purposive sampling technique was used to select the banks. Hence, 10 commercial banks have been selected and contacted, where the sample respondents, staffs of risk management section( risk experts and officers) were used. Besides, the study is interested in banks that have been operational and whose ages are 10 and above. As it is a qualitative research, the research was rely highly on primary data, therefore, appropriate instruments need to be employed, that has been included Interview, questionnaire analyzed . The findings of the study show that commercial banks conduct stress testing on historical data and conduct the extensive sensitivity analysis and very limited hypothetical scenario analysis used on institutional context. Even though stress test had found to be determinant tool in risk management, needed to be employed extensively and synergistically in all risk factors by considering macroeconomic variables. Furthermore, banks should have a written guideline governing the stress testing framework in place to enhance its effectiveness. Keyword: Stress testing, sensitivity analysis, scenario analysis, Ethiopian commercial banks



Stress testing, Sensitivity analysis, Scenario analysis, Ethiopian commercial banks