Abstract:
This study investigates the effects of financial risks on the financial performances of sampled
commercial banks in Ethiopia. Six independent variables focusing on Return on Assets were
selected based on a review of available empirical evidence and consideration of the nature
and data availability of Ethiopian commercial banks. The study examines the effects of seven
bank-specific risks over the period of 2017 to 2023, including Inflation risk, Interest return
risk, Foreign exchange risk, real lending interest risk, Real growth product, and Credit risk.
Adopting a mixed research approach with a dominant quantitative method, data were collected
primarily through a survey of documents, including structured reviews of annual financial
statement reports. Descriptive statistics, multiple linear regression model assumptions tests,
and hypothesis testing were conducted using statistical software. The study reveals significant
negative effects of credit risk, inflation risk, real lending interest rate risk, interest rate risk,
and foreign exchange rate risk on the financial performance of sampled commercial banks,
while real GDP growth rate had a significant positive effect. About 77.9% of Return on Assets
was covered through the study, leaving 21.1% for further investigation. Recommendations
include implementing robust credit risk management strategies, supporting initiatives for real
gross rate enhancement, mitigating inflation rate effects, managing real lending interest rate
risk, mitigating interest rate risk, managing foreign exchange risk, and conducting further
research to explore additional factors impacting financial performance. Implementing these
recommendations help Ethiopian commercial banks effectively manage financial risks,
enhance financial performance, and contribute to economic development.
