Abstract:
Most of the researches cover US, Europe and African countries and no study is found in
the context of Ethiopia to the best of the knowledge of the researcher. Therefore, the
general objective of the study was to investigate the effect of credit risk on the
profitability of private banks. The data were collected from 8 private banks. Secondary
data collection instruments were used to collect data in the study. The secondary data
collected from bank audit report and financial statement. The quantitative data analyzed
with mea, correlation and regression. Regarding ROA the study found that sample private
bank has lower return on asset. The study found that sample private bank averagely
returns for their owners during the period under the study. The study found that CAR is
below the minimum requirement of CAR for Ethiopia bank. Capital adequacy showing a
positive relationship with profitability means banks with better capital adequacy ratio
communicate confidence to customers hence the willingness of customers to deposit
money in those banks. Nonperforming loan ratio (NPLR) related negatively which is quiet
significant. Loan to deposit ratio related has no significant effect on ROE. Capital
adequacy (CAR) insignificantly related with ROA indicating that the lower the reserved
capital, lower the return on assets. From the analysis, it is noted that the Nonperforming
loan ratio had negative correlation with ROA. The ratio of loans to deposit (LATDR) on
the other hand had insignificant effect on ROA. The study thus recommends that these
banks should keep adequate capital levels and keep quality assets on their books since the
outcome of the study suggest significant relationship between credit risk indicators and
profitability.
