The Effect of Credit Risk on Financial Performance of Commercial Banks in Ethiopia

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.