The Effect Of Credit Risk On The Profitability Of Private Banks

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.