The Impact of Credit Risk Management on Financial Performance of Commercial Banks in Ethiopia

Habtamu Alebachew Legass; Hussen Abdulkadir Roba

doi:doi:10.11648/j.jfa.20241206.11

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The Impact of Credit Risk Management on Financial Performance of Commercial Banks in Ethiopia

Habtamu Alebachew Legass^*

, Hussen Abdulkadir Roba

Published in Journal of Finance and Accounting (Volume 12, Issue 6)

Received: 5 October 2024 Accepted: 29 October 2024 Published: 29 November 2024

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Abstract

This study delves into the intricate relationship between credit risk management strategies and the financial performance of commercial banks in Ethiopia. By analyzing data from 14 banks over a span of 13 years (2011-2023) using correlation and regression analyses in E-Views 12 software, the research sheds light on the impact of key indicators such as credit interest income ratio, loan to total deposit ratio, and loan to total asset ratio on financial outcomes. The findings reveal that while certain metrics positively influence financial performance, such as credit interest income and loan ratios, the presence of nonperforming loans exerts a negative impact on bank profitability, emphasizing the critical need for effective management of credit risks to ensure sustained financial health. In light of these results, it is recommended that Ethiopian commercial banks prioritize the enhancement of credit risk management practices, with a specific focus on strategies to address nonperforming loans. Strengthening credit analysis frameworks and refining loan administration processes are crucial steps towards safeguarding profitability and bolstering long-term stability within the banking sector. Policymakers and industry stakeholders are encouraged to collaborate in developing and implementing robust risk management frameworks that not only protect the financial viability of commercial banks but also contribute to the resilience and growth of the broader financial landscape in Ethiopia.

Published in	Journal of Finance and Accounting (Volume 12, Issue 6)
DOI	10.11648/j.jfa.20241206.11
Page(s)	142-155
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2024. Published by Science Publishing Group

Keywords

Commercial Banks, Non-Performing Loans, Ethiopia, and Credit Risk

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APA Style

Legass, H. A., Roba, H. A. (2024). The Impact of Credit Risk Management on Financial Performance of Commercial Banks in Ethiopia. Journal of Finance and Accounting, 12(6), 142-155. https://doi.org/10.11648/j.jfa.20241206.11

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ACS Style

Legass, H. A.; Roba, H. A. The Impact of Credit Risk Management on Financial Performance of Commercial Banks in Ethiopia. J. Finance Account. 2024, 12(6), 142-155. doi: 10.11648/j.jfa.20241206.11

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AMA Style

Legass HA, Roba HA. The Impact of Credit Risk Management on Financial Performance of Commercial Banks in Ethiopia. J Finance Account. 2024;12(6):142-155. doi: 10.11648/j.jfa.20241206.11

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@article{10.11648/j.jfa.20241206.11,
  author = {Habtamu Alebachew Legass and Hussen Abdulkadir Roba},
  title = {The Impact of Credit Risk Management on Financial Performance of Commercial Banks in Ethiopia
},
  journal = {Journal of Finance and Accounting},
  volume = {12},
  number = {6},
  pages = {142-155},
  doi = {10.11648/j.jfa.20241206.11},
  url = {https://doi.org/10.11648/j.jfa.20241206.11},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jfa.20241206.11},
  abstract = {This study delves into the intricate relationship between credit risk management strategies and the financial performance of commercial banks in Ethiopia. By analyzing data from 14 banks over a span of 13 years (2011-2023) using correlation and regression analyses in E-Views 12 software, the research sheds light on the impact of key indicators such as credit interest income ratio, loan to total deposit ratio, and loan to total asset ratio on financial outcomes. The findings reveal that while certain metrics positively influence financial performance, such as credit interest income and loan ratios, the presence of nonperforming loans exerts a negative impact on bank profitability, emphasizing the critical need for effective management of credit risks to ensure sustained financial health. In light of these results, it is recommended that Ethiopian commercial banks prioritize the enhancement of credit risk management practices, with a specific focus on strategies to address nonperforming loans. Strengthening credit analysis frameworks and refining loan administration processes are crucial steps towards safeguarding profitability and bolstering long-term stability within the banking sector. Policymakers and industry stakeholders are encouraged to collaborate in developing and implementing robust risk management frameworks that not only protect the financial viability of commercial banks but also contribute to the resilience and growth of the broader financial landscape in Ethiopia.
},
 year = {2024}
}

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TY  - JOUR
T1  - The Impact of Credit Risk Management on Financial Performance of Commercial Banks in Ethiopia

AU  - Habtamu Alebachew Legass
AU  - Hussen Abdulkadir Roba
Y1  - 2024/11/29
PY  - 2024
N1  - https://doi.org/10.11648/j.jfa.20241206.11
DO  - 10.11648/j.jfa.20241206.11
T2  - Journal of Finance and Accounting
JF  - Journal of Finance and Accounting
JO  - Journal of Finance and Accounting
SP  - 142
EP  - 155
PB  - Science Publishing Group
SN  - 2330-7323
UR  - https://doi.org/10.11648/j.jfa.20241206.11
AB  - This study delves into the intricate relationship between credit risk management strategies and the financial performance of commercial banks in Ethiopia. By analyzing data from 14 banks over a span of 13 years (2011-2023) using correlation and regression analyses in E-Views 12 software, the research sheds light on the impact of key indicators such as credit interest income ratio, loan to total deposit ratio, and loan to total asset ratio on financial outcomes. The findings reveal that while certain metrics positively influence financial performance, such as credit interest income and loan ratios, the presence of nonperforming loans exerts a negative impact on bank profitability, emphasizing the critical need for effective management of credit risks to ensure sustained financial health. In light of these results, it is recommended that Ethiopian commercial banks prioritize the enhancement of credit risk management practices, with a specific focus on strategies to address nonperforming loans. Strengthening credit analysis frameworks and refining loan administration processes are crucial steps towards safeguarding profitability and bolstering long-term stability within the banking sector. Policymakers and industry stakeholders are encouraged to collaborate in developing and implementing robust risk management frameworks that not only protect the financial viability of commercial banks but also contribute to the resilience and growth of the broader financial landscape in Ethiopia.

VL  - 12
IS  - 6
ER  -

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Author Information

Habtamu Alebachew Legass

Department of Islamic Economics and Finance, Sakarya University, Sakarya, Turkey

Contact Email

http://orcid.org/0000-0002-7127-1719
Hussen Abdulkadir Roba

Department of Accounting and Finance, Madda Walabu University, Bale Robe, Ethiopia

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Plain Text BibTeX RIS

APA Style

Legass, H. A., Roba, H. A. (2024). The Impact of Credit Risk Management on Financial Performance of Commercial Banks in Ethiopia. Journal of Finance and Accounting, 12(6), 142-155. https://doi.org/10.11648/j.jfa.20241206.11

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ACS Style

Legass, H. A.; Roba, H. A. The Impact of Credit Risk Management on Financial Performance of Commercial Banks in Ethiopia. J. Finance Account. 2024, 12(6), 142-155. doi: 10.11648/j.jfa.20241206.11

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AMA Style

Legass HA, Roba HA. The Impact of Credit Risk Management on Financial Performance of Commercial Banks in Ethiopia. J Finance Account. 2024;12(6):142-155. doi: 10.11648/j.jfa.20241206.11

Copy | Download

@article{10.11648/j.jfa.20241206.11,
  author = {Habtamu Alebachew Legass and Hussen Abdulkadir Roba},
  title = {The Impact of Credit Risk Management on Financial Performance of Commercial Banks in Ethiopia
},
  journal = {Journal of Finance and Accounting},
  volume = {12},
  number = {6},
  pages = {142-155},
  doi = {10.11648/j.jfa.20241206.11},
  url = {https://doi.org/10.11648/j.jfa.20241206.11},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jfa.20241206.11},
  abstract = {This study delves into the intricate relationship between credit risk management strategies and the financial performance of commercial banks in Ethiopia. By analyzing data from 14 banks over a span of 13 years (2011-2023) using correlation and regression analyses in E-Views 12 software, the research sheds light on the impact of key indicators such as credit interest income ratio, loan to total deposit ratio, and loan to total asset ratio on financial outcomes. The findings reveal that while certain metrics positively influence financial performance, such as credit interest income and loan ratios, the presence of nonperforming loans exerts a negative impact on bank profitability, emphasizing the critical need for effective management of credit risks to ensure sustained financial health. In light of these results, it is recommended that Ethiopian commercial banks prioritize the enhancement of credit risk management practices, with a specific focus on strategies to address nonperforming loans. Strengthening credit analysis frameworks and refining loan administration processes are crucial steps towards safeguarding profitability and bolstering long-term stability within the banking sector. Policymakers and industry stakeholders are encouraged to collaborate in developing and implementing robust risk management frameworks that not only protect the financial viability of commercial banks but also contribute to the resilience and growth of the broader financial landscape in Ethiopia.
},
 year = {2024}
}

Copy | Download

TY  - JOUR
T1  - The Impact of Credit Risk Management on Financial Performance of Commercial Banks in Ethiopia

AU  - Habtamu Alebachew Legass
AU  - Hussen Abdulkadir Roba
Y1  - 2024/11/29
PY  - 2024
N1  - https://doi.org/10.11648/j.jfa.20241206.11
DO  - 10.11648/j.jfa.20241206.11
T2  - Journal of Finance and Accounting
JF  - Journal of Finance and Accounting
JO  - Journal of Finance and Accounting
SP  - 142
EP  - 155
PB  - Science Publishing Group
SN  - 2330-7323
UR  - https://doi.org/10.11648/j.jfa.20241206.11
AB  - This study delves into the intricate relationship between credit risk management strategies and the financial performance of commercial banks in Ethiopia. By analyzing data from 14 banks over a span of 13 years (2011-2023) using correlation and regression analyses in E-Views 12 software, the research sheds light on the impact of key indicators such as credit interest income ratio, loan to total deposit ratio, and loan to total asset ratio on financial outcomes. The findings reveal that while certain metrics positively influence financial performance, such as credit interest income and loan ratios, the presence of nonperforming loans exerts a negative impact on bank profitability, emphasizing the critical need for effective management of credit risks to ensure sustained financial health. In light of these results, it is recommended that Ethiopian commercial banks prioritize the enhancement of credit risk management practices, with a specific focus on strategies to address nonperforming loans. Strengthening credit analysis frameworks and refining loan administration processes are crucial steps towards safeguarding profitability and bolstering long-term stability within the banking sector. Policymakers and industry stakeholders are encouraged to collaborate in developing and implementing robust risk management frameworks that not only protect the financial viability of commercial banks but also contribute to the resilience and growth of the broader financial landscape in Ethiopia.

VL  - 12
IS  - 6
ER  -

Copy | Download