The Effect Of Financial Risk On Financial Performance: A Study On Private Commercial Banks Of Ethiopia

Abstract

The main purpose of this study was to identify the effect financial risk on financial performance of Ethiopian private commercial banks. To achieve the objective of the study the quantitative research approach was adopted with eleven years data from 2009 to 2019. The study was selected ten private commercial banks of Ethiopia as sample size. The data was collected from audited financial statement of national banks of Ethiopia and Ministry of finance & Economic development. Besides to this, balanced panel data were employed in the study. The fixed effect model was employed to identify bank and macro-economic variables effect of financial performance measures using the proxy’s variables; earnings before income tax to total asset (ROA), and net income after tax to equity (ROE). The two model adopted in this study were Return on asset (ROA) and Return on equity (ROE). The finding of the first model earnings before income tax to total asset(ROA) fixed effect regression model revealed that interest rate risk, exchange rate risk, solvency risk and operational efficiency had positive significant on financial performance whereas, liquidity risk and growth domestic product have negative significant effect on financial performance of Ethiopian private commercial banks. The finding of second model net income after tax to equity (ROE) of fixed effect regression model revealed that credit risk and exchange rate risk have significant impact on financial performance while, liquidity risk, solvency risk, capital adequacy ratio and growth domestic product have negative significant effect on financial performance of Ethiopian private commercial banks. Therefore, based on the result of the study it’s suggested that Ethiopian government and National Bank of Ethiopian should be formulated adequate measures, policies and strategies to check the level of foreign exchange rate and interest rate to improve banks’ foreign exchange transactions and financial performance, Ethiopian private commercial banks should be financially stable to be able to sustain their daily operations and raise liquid holdings in order to reduce liquidity risk and Ethiopian private commercial banks should prepare themselves for the change in economic growth for Gross Domestic Product.