Credit Risk Management and Its Impact on Performance of Commercial Banks: In of Case Ethiopia

Abstract

Credit risk management in financial institutions has become more important not only because of the financial transactions performances but also protecting crisis that the industry is experiencing in the bust and somehow in the present. Moreover, it is also a means of or a crucial concept that determine commercial performance for the success, sustainable growth, and consistent profitability. The purpose of this paper is to investigate the relationship between credit risk management and its impact on performance of commercial banks in Ethiopia. This study is primarily based on secondary data. Secondary data were collected from nine (09) commercial banks in Ethiopia. The secondary data were obtained from various sources such as Annual Reports of the selected commercial banks, National bank of Ethiopia, relevant articles, books and magazines etc. The panel data of a six year period from 2009 to 2014 from the selected banks were used to examine the relationship between credit risk and performances. The data were analyzed using descriptive statistics and panel data regression model by using SPSS software version 22 and the Return on Assets (ROA) and Return on equity were used as performance variables and Capital Adequacy Ratio(CAR).Non-Performing Loans to Total Loans (NPLR), Loan provision to Total Loan Ratio(LPTLR), Loan Provision to Non-Performing Loans Ratio (LPNPLR), Loan Provision to Total Assets Ratio(LPTAR) and Non-Performing Loans to Total Loans (NPLTLR) were used as variables of credit risk management. The findings reveal that there is strong relationship between credit risk management and commercial bank performance in Ethiopia.

Keywords: Risk Management, Credit Risk, Credit Risk Management, Credit enhancement, CAR, NPLR, ROA, ROE.