The Effect of Credit Risk on Financial Performance of Selected Private Banks in Ethiopia

Abstract

This study was to investigate the effect of credit risk on financial performance of selected private banks in Ethiopia. In order to investigate these study quantitative research approach was employed based secondary and primary data. Primary data collected through questionnaire and secondary data gathered through NBE annual report. A panel data from six selected private banks covering the ten-year period (2010-2019) was analyzed within the fixed effects model on regression analysis. The study used one dependent variable return on asset (ROA), four independent variables they were: nonperforming loan to total loan and advance ratio (NPLTLA), loan provision to total loan and advance ratio (LPTLA), total loan and advance to total deposit ratio (TLATD) and the ratio of non-performing loan to loan provision (NPLLP) as measures of credit risk. Both descriptive statistics and regression analysis specifically fixed effects model were used to analyze the relationships of the depended variable with explanatory variables. The regression result show that non-performing loan to loan provision and total loan and advance to total deposit positive relation to the dependent variable ROA and non-performing loan to total loan and advance and, loan provision to total loan and advance negatively related to the ROA . The research concluded that credit risk has significant effect on financial performance of selected private banks in Ethiopia. Hence, the study recommend in support of each variable for private banks of Ethiopia should enhance their capacity in credit analysis and loan administration. There is need to strengthen bank lending policy through effective and efficient regulators supervision and monitoring; when facility is give out especially during utilization of the facility by the borrower. Banks should try as much as possible to strike a balanced in their loan pricing decision