Default Risk Management &Financial Performance of Commercial Banks in Ethiopia

Abstract

This study is aimed to identify the effect of credit risk management on profitability of commercial banks of Ethiopia over the period of 2012-2022 G.C. The researcher employed quantitative research approach with explanatory research design.  The result of regression analysis of random effect model was applied to investigate the effect of explanatory variables on the profitability. The findings of this study show that, capital adequacy has positive and statistically significant effect on financial performance of commercial banks in Ethiopia. Besides, variables like loan to deposit ratio and loan provision ratio have positive and statistically significant effect on profitability of commercial banks.    In opposite direction, non-performing loan, loan to total asset ratio and cost per loan have negative and statistically significant effect on ROA respectively. The profitability measured through ROA was best explained by explanatory variables incorporated in the model. Hence, the researcher suggested that the financial performance of commercial banks can be improved through improving credit risk management function of banks by giving attention on the studied variables with statistically significant effect on profitability.

Keywords: Profitability; Credit risk Management; Commercial Banks, Ethiopia

DOI: 10.7176/RJFA/14-11-02

Publication date:June 30^th 2023