Effect of Credit Risk Management on the Performance of Commercial Banks in Ethiopia
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Date
2019-02
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Addis Ababa University
Abstract
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 5 years (2013-2017). The empirical investigation uses the
accounting measure of Return on Assets (ROA), which is the dependent variable, to represent
Banks’ performance. The study fundamentally involves both descriptive and econometrics
techniques. The econometrics method used in the study basically involves assessing the impact of
selected internal variables, the provision to total loans, loan to total asset, credit administration
(cost to total loans) and natural logarithm of total asset (Economies of scale), on the
performance of the banking sector. To this end multiple linear regressions model is used to
measure the explanatory power of the independent variables above on a dependent variable.
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 provision to total loans, loan to total asset, credit administration (cost to total loans) and
Size (Economies of scale) have significant effect on the performance of 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.
Description
A thesis submitted to the department of accounting and finance of Addis Ababa University in partial fulfillment of the requirements for the degree of Masters of Science in Accounting and Finance
Keywords
Bank, Credit Risk, Effect, Ethiopia, Performance