Abstract:
This study aims to assess the effect of credit risk management (CRM) practices on loan performance in selected Ethiopian private commercial banks. The primary objective is to identify how bank-specific factors—such as Loan Loss Provision (LLP), Capital Adequacy Ratio (CAR), Return on Equity (ROEE), and Bank Size (Bank_S)—as well as macroeconomic variables—namely GDP Growth Rate (GDPG) and Inflation Rate (INFLL)—influence loan collection performance. The study employs a quantitative research approach using balanced panel data from five commercial banks covering the period 2019 to 2023. The Fixed Effects Model was used as the main estimation technique, allowing for control of unobserved heterogeneity across banks. The empirical findings indicate that LLP, CAR, and ROEE have a significant and positive impact on loan performance, suggesting that banks with prudent provisioning policies, stronger capital buffers, and higher profitability are better positioned to manage credit risk and enhance loan recovery. Bank size also contributes positively to performance, although the effect varies depending on institutional capacity. On the macroeconomic front, GDP growth was found to improve loan performance, while inflation had a significant negative effect, undermining borrowers’ repayment capacity. Based on these results, the study recommends that Ethiopian banks strengthen their CRM systems by improving LLP accuracy, maintaining adequate capital reserves, and enhancing profitability through operational efficiency. Moreover, banks should adopt flexible risk management strategies that adjust to macroeconomic conditions, particularly during inflationary periods. Policymakers are also encouraged to support smaller banks in building CRM capacity and to align regulatory frameworks with dynamic economic indicators. Overall, the study emphasizes the need for strategic, data-driven, and context-sensitive CRM practices to ensure financial stability and sustainable loan performance in the Ethiopian banking sector
