Abstract:
The paper was designed to find out the effects of credit risk on financial performance of
commercial banks in Ethiopia. This is an explanatory type of research with a panel data design
with the panel data spanning from 2010 to 2020 on all seventeen commercial banks operating in
Ethiopia. The data was collected from National Bank of Ethiopia and financial statement of
commercial banks working in Ethiopia. The finding from the trend developments in Ethiopian
commercial bank shows that the development in credit risk and return on asset seems stable and
indirectly related since 2010. The result has revealed that credit risk is negatively affecting the
financial performances in the commercial banks in Ethiopia. This finding however, is
statistically less significant as the data we have used fails to show that credit risk is statistically
significantly reducing financial performances. On the other hand, the findings show that
increasing banking size and efficiencies are significantly improving the financial performances
in Ethiopia. Hence, this study recommends that commercial Banks operating in Ethiopia should
minimize the credit risks by determining creditworthiness of potential customer during their loan
disbursement to improve their performances.
