Effect of Credit Risk on Profitability and Lending Decision of Commercial Banks in Ethiopia

Abstract

Banking sector has many risks than other sectors of the economy. Credit risk is the most apparent risk in the banking and possibly the most important in terms of potential losses. Ethiopian banking history, in its modern sense began towards the end of the reign of Emperor Menilek II. This study examines the effect of credit risk on profitability and lending decision of commercial banks in Ethiopia and limiting to only for private commercial banks in Ethiopia. In an attempt to meet the research objective, a quantitative analysis was used. The strongly balanced panel data of thirteen years from 2005 to 2017 from the sampled commercial banks were used. The research used both descriptive and regression for analyzing the panel data. The result indicates that non-performance loan to total loans is significalty and negatively related with ROE and ROA. Loan provision to total loan of the banks is significantly negatively related with lending decision.

Keywords: credit risk, lending decision, profitability