The Impact of Credit Risk Management on Financial Performance of Commercial Banks –Evidence from Eritrea

Abstract

This study focuses on the impact of credit risk management on the performance of commercial banks in Eritrea. The main indicators used in this study are Return on Assets (ROA), Non-performing Loans Ratio (NPLR), Capital Adequacy Ratio (CAR), Loan and Advances Ratio (LAR) and Loan Loss Provision Ratio (LLPR). The researches collects data from Commercial Bank of Eritrea and Housing and Commerce Bank of Eritrea from 1998 to 2015. Descriptive and panel data regression analysis are used in order to test the relationship between the four indicators and the performance of commercial banks in Eritrea. The findings show that credit risk management is inversely associated with bank performance. The nonperforming loan, and loan and advances ratios significantly and negatively affected performance of the commercial banks. The result indicates that loan and advances ratio are negative but statistically insignificant. There is a positive relationship between CAR and ROA.  The significant positive relationship between loan loss provision and commercial banks performance in this study could indicate the presence of potential earning management activities by bank managers.

Keywords: Performance, Credit risk management, Commercial Banks, Eritrea