Credit Risk Management And Its Impact On Financial Performance Of Ethiopian Private Commercial Banks

Abstract

This study has carry out an empirical investigation in to the quantitative effect of credit risk management on the financial performance of Ethiopian private commercial banks over the period of the years (2004-2013). The researcher has selected six private commercial banks using purposive sampling considering their seniority in the industry, availability of data and allotted time for the research. The traditional profit theory has employed to formulate profit measured by Return on Asset (ROA), as a function of the ratio of Non-performing loan to Total loans & Advances (NPL/LA), ratio of Loan provision to Total Asset (LP/TA), Loan Provision to Total Loans and Advances (LP/TL) and the ratio of Loan Provision to Non-performing loan (LP/NPL) as measures of credit risk. Using panel data from 2004-2013 which the researcher have collected from selected banks annual report, have examined the impact of credit risk management on performance of private banks. The collected data was analyzed using descriptive statistics and fixed effect panel regression model. The study summarizes that banks used different credit risk management tools, techniques and assessment models to manage their credit risk, the credit risk management and that they all have one main objective, i.e. to reduce the amount of loan default, which is a principal cause of bank failure. The banks management should have to implement appropriate strategy in identifying the real impact of nonperforming loans on the financial performance. Because the findings of the researcher indicate that the sampled have poor credit risk management practices; hence the high levels of the nonperforming loans in their loans portfolios. This is with a view to provide further empirical evidence on how credit risk management strategies affect banks’ performance in Ethiopia.