The Effect Of Financial Risk On Financial Performance Of Selected Private Commercial Banks In Ethiopia

Abstract

The main objective of this study was to examine how financial risk influences the financial performance of specific private commercial banks. In this study, the dependent variable was financial performance, while the independent variables were liquidity risk and credit risk. The study also considered bank interest rate risk, inflation risk, and growth domestic product and ban size as a control variables. Secondary data were collected from various sources, including banks websites, annual reports from Nation bank Ethiopia, and macroeconomic data from ministry of finance. The study employed a causal research design, aiming to establish a cause and effect relationship between financial risk and financial performance. The research approach chosen for the study was a quantitative research method. Data analysis involved the use of multiple regression, correlation, and descriptive models. The findings were presented through mean values, standard deviations, percentages, tables and graphs. The overall R-squared value for the model was 54.41%, indicating that the independent variables explained a significant portion of the variation in the dependent variables, which was the return on assets (ROA) of the selected commercial banks in Ethiopia. This suggests that liquidity risk, interest rate risk, inflation risk , credit risk and gross domestic product collectively play a crucial role in determining the impact of financial risk on financial performance of analyzed private Ethiopian commercial banks. The statistical analysis confirmed that the entire model was statistically significant with p-value of less than 0.05. The study further revealed that interest rate risk had a negative and statistically significant effect on financial performance, while credit risk had a positive and statistically significant impact. However, the remaining variables, namely liquidity risk, inflation risk and growth domestic product, had statistically insignificant effects on the financial performance of the selected commercial banks in Ethiopia. Based on the study’s findings, it is recommended that banks continuously monitor interest rate movements and adjust their interest rate policies in response to market conditions to mitigate the negative effects on interest rate risk.