The Impact of Credit Risk Management on Performance of Banks The Case Study of Selected Commercial Banks in Ethiopia

Abstract

This study is aim at examining the impact of credit risk management on the performance of commercial banks in Ethiopia. Thus, the major focus is to investigate empirically bank specific, industry specific and macroeconomic factors that affect banks performance. In this study, the researcher used only secondary sources of data. Data to do the analysis is obtained from annual report of each selected commercial banks, National Bank annual report and MoFED. The study used eight selected commercial banks which served in the industry for elven years and above among seventeen commercial banks which is functional at the moment in Ethiopia banking industry. The study used panel data random effect model for analysis methods of the impact of credit risk management on performance commercial banks in Ethiopia over the years 2005 to 2015. The collected data were analyzed by using stata version- 12 econometric soft were for running descriptive and regression analysis. Return on asset used as a dependent variable whereas non- performing loan ratio, deposit growth rate, income diversification, bank size, industry concentration, interest rate spread, GDP growth rate and inflation growth rate as an independent variable. The panel data random effect model result shows that the credit risk which is measured by non-performing loan ratio, deposit growth rate and interest rate spread had a significant inverse impact on banks performance while income diversification and industry concentration have a positive significant impact on banks performance. In addition, the study founds bank specific factors like bank size and macroeconomics variable such as GDP growth and Inflation rate had no significant impact on banks performance. In general, this study concluded that Bank Specific factors, industry specific factors and macroeconomics variable factors had a significant impact on banks performance though the bank specific factors has a greatest impact of all other