The Effect Of Risk Management On Financial Performance: Of Commercial Bank Of Ethiopia

Abstract

In the aftermath of the global financial crisis, risk management became a major area of focus for stakeholders in the financial sector.This study was aimed to examine the effect of risk management on commercial banks’ financial performance in the context of Ethiopia. Two bank financial performance indicators were used as the dependent variables i.e., Return on assets and return on equity while credit risk, liquidity risk, solvency risk, operational risk, interest rate risk, and foreign exchange rate risk were used as proxies for risk management.The study target population was more than 28 commercial banks in Ethiopia and the study covered a period of 12 years from 2012 to 2024.To this end, the study adopts a mixed research approach by combining documentary analysis and in-depth unstructured interviews. The data was obtained from published annual financial statements of thirteen (13) commercial banks in Ethiopia.Descriptive statistics, correlation, and regression analyses were applied to analyzeTime-Series Cross-Sectional balanced secondary data. The results of regression analysis showed that credit risk, liquidity risk, solvency risk, operational risks havea negative and statistically significant effect on financial performance, while foreign exchange rate risk has a statistically significant and positive influence on the financial performance of the Ethiopian commercial banks.Based on the panel regression approach, the study concluded thatthe risk management variables considered in this study werea key factor in affecting the financial performance of commercial banks in Ethiopia. Thus, the study suggested that Ethiopian commercial banks should maintain a proper balance between risk management practices and financial performance by engaging in appropriate credit, liquidity operational, and market risk management that will ensure safety for their banks and yield positive profits