The Effect of Credit Risk Management on Profitability of Microfinance Institution in Addis Ababa
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Date
2021-07
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A.A.U
Abstract
The objective of the study is to empirically examine the quantitative effect of credit risk
management on the profitability of Microfinance Institutions in Addis Ababa. The study has
chosen the ROE and ROA as the proxies for profitability. Whereas, the traditional credit risk
ratios indicators which are Total Loan to Total Assets (TLTA), Total Loan to Total Deposit
(TLTD) and Non- Performing Loan to Total Loan (NPLTL) are used as independent variables to
measure the amount of credit level of the MFIs. This was done by collecting data from 8 MFIs
operated in Addis Ababa and their annual report for the period from 2009 to 2018 which was
published by Association of Ethiopia Microfinance Institution (AEMFI). The data collected was
analyzed with the aid of descriptive statistical techniques such as mean, maximum, minimum,
and standard deviation. More so, multiple linear regressions were used to establish the
relationship between study variables and to test the hypotheses using STATA software. The study
made six hypotheses and two regression tests for the two independent variables, ROE and ROA.
Key findings from the study confirmed that, Non- Performing Loan to Total Loan (NPLTL) ratio
has negatively and significantly influences on both Return on Asset (ROA) and Return on Equity
(ROE). Total Loan to Total Deposit (TLTD) ratio has negatively and significantly influences on
profitability of MFIs measured in terms of Return on Equity (ROE). The study further found that
Total Loan to Total Asset (TLTA) ratio has positively and significantly influences on return on
equity (ROE) while it positive but insignificant effect on return on asset (ROA). Based on the
study it is recommended that MFIs need to adopt a rigor credit risk management policy, develop
their credit risk control capacity, and establish sound and competent credit risk management
department. Further research with large sample size and additional indicators of credit risk
management and performance is also an interesting expansion for this research.
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Keywords
Credit risk management, Microfinance institutions