Abstract:
In the aftermath of the global financial crisis, risk management became a major area of focus for
stakeholders in the financial sector. This study was aimed to examine the effect of risk
management on commercial banks’ financial performance in the context of Ethiopia. Return on
assets was used as indicator of financial performance indicators while credit risk, liquidity risk,
solvency risk, operational risk, interest rate risk, and foreign exchange rate risk were used as
proxies for risk management. The study target population was all 18 commercial banks in
Ethiopia and the study covered a period of 10 years from 2010 to 2019. To this end, the study
adopts a mixed research approach by combining documentary analysis and in-depth
unstructured interviews. The data was obtained from published annual financial statements of
thirteen (13) commercial banks in Ethiopia. Descriptive statistics, correlation, and regression
analyses were applied to analyze Time-Series Cross-Sectional balanced secondary data. The
results of regression analysis showed that credit risk, liquidity risk, solvency risk, operational
risks have a negative and significant effect on financial performance, while foreign exchange
rate risk has a statistically significant and positive influence on the financial performance of the
Commercial banks in Ethiopia. Based on the panel regression approach, the study concluded
that the risk management variables considered in this study were a key factor in affecting the
financial performance of commercial banks in Ethiopia. Thus, the study suggested that
Commercial banks in Ethiopia should maintain a proper balance between risk management
practices and financial performance by engaging in appropriate credit, liquidity operational,
and market risk management that will ensure safety for their banks and yield positive profits.
