The The effect of credit risk management on the performance of Commercial Banks in Ethiopia
DOI:
https://doi.org/10.51359/2594-8040.2026.268047Keywords:
credit risk management, profitability, commercial banksAbstract
The study investigated the impact of credit risk management on the profitability of commercial banks in Ethiopia. The research adopted explanatory research design and a quantitative approach were employed. It used descriptive and inferential statistical analyses techniques. The population of this study includes 31 commercial banks that are working in Ethiopia, from which a purposive sample of ten leading banks were selected on the basis of their branch network and operational age. The study is panel from the period between 2013 and 2023. The Random effects Generalized Least Squares model was utilized as panel data regression analysis to test the impact of credit risk management factors on bank performance. The regression result shows that Non-Performing Loans were found to have a significant negative impact on bank profitability, which implies that a high level of non-performing loans decreases bank profitability, emphasizing the importance of effective credit risk management. Conversely, and contrary to conventional assumptions, both a higher Loan to Total Asset Ratio and Loan to Deposit Ratio were unexpectedly associated with decreased profitability, suggesting an optimal threshold for lending activity exists beyond which excessive loan expansion introduces detrimental liquidity and credit risks. In alignment with established financial principles, Capital Adequacy significantly enhanced bank performance, underscoring its crucial role in providing essential buffers against losses, maintaining stability, and fostering stakeholder confidence for sustainable returns. Bank size as measured by total assets is positively related to better performance but insignificance effect on it.
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