The Effect of Credit Risk Management on Profitability of Microfinance Institution in Addis Ababa

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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.



Credit risk management, Microfinance institutions