Determinants Of Financial Risks Of Private Commercial Banks In Ethiopia

Abstract

Financial risk is one of the major risks of banks that can affect the development of financial system and identifying the determinants of this risk is crucial for the soundness of financial sector. The main objective of this study to identify the determinants of financial risk in Ethiopian private commercial banks covering a period of eleven years (2009-2019) on ten sample private commercial banks using quantitative research approach. This study directly examined indicators of financial risk in terms of credit risk and liquidity risk in an objective manner from a wide range of variables. Bank specific, macroeconomic, industry factors and Government policy variables were tested for the two dependent variables credit and liquidity risk models by using the balanced panel random effect regression model. The findings of the study for credit risk model revealed return on asset and Management Efficiency have significant positive impact on credit risk whereas loan growth and gearing ratio and found significant negative impact on credit risk of Ethiopian private banks during the test period 2009 to 2019. The regression result of the second financial risk indicator liquidity risk revealed that capital adequacy ratio, bank age, Liquidity management and Lending interest rate have significant positive impact on liquidity risk whereas return on asset have significant negative impact on liquidity risk.