The Impact of Credit Risk Management on the Performance of Commercial Banks in Ethiopia: In the Case of Private Commercial Banks in Ethiopia

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Addis Ababa University


The objective of the study is to empirically examine the quantitative effect of credit risk on the performance of commercial banks in Ethiopia, considering variables related to lending activities, over the period of nine years (2008-2016). The empirical investigation uses the accounting measure of Return on Assets (ROA), which is the dependent variable, to represent Banks’ performance. The study involves both descriptive and econometrics techniques. The econometrics method used in the study involves assessing the effect of selected internal variables, the non-performing loan, capital adequacy, liquidity, loan growth, cost to income ratio and natural logarithm of total asset (Economies of scale), and macro-economic variables: Gross domestic products (GDP) and Inflation on the performance of the banking sector. To this end multiple linear regression model is used to measure the relative weighting of the independent variables above on the banks performance (ROA). Basic descriptive statistics was applied for trend analysis. A non- probability method in the form of judgmental sampling technique is employed in selecting the eight Banks into the sample and the data are sourced from the annual reports of the same banks which account for over eighty percent of the total loan and advance in the industry. The study finds that the selected variables: the non-performing loans, capital adequacy, liquidity, cost to income ratio credit administration and Size (Economies of scale) have significant effect on the performance of private banks. However, a certain variation in the magnitude and direction of their effect on the selected profitability measure, Return on Asset. Based on the study it is recommended that Ethiopian banks need to develop their credit risk management capacity, there should also be control over overhead costs related to lending, and increasing the loan book size without compromising the sound credit planning should be a priority task.


Thesis submitted to the department of accounting and finance, in partial fulfillment of the requirements for the Master of Science degree in accounting and finance


Bank, Credit Risk, Ethiopia