EFFECT OF CREDIT DEFAULT MANAGEMENT ON THE FINANCIAL PERFORMANCE OF SELECTED COMMERCIAL BANKS IN ETHIOPIA

Abstract

This study was conducted to examine the impact of credit default risk management and other bank specific and macroeconomic variables on the financial performance of seven sample selected private commercial banks using a balanced panel data from 2007-2017. These data were collected from NBE and World Bank World Development Indicators. To achieve the intended objective this study employed descriptive and econometrics techniques. The empirical investigation uses the accounting measure of Return on Assets (ROA) and Return on Equity (ROE), which are the dependent variables used to represent Banks’ performance. Furthermore, based on the diagnostic test conducted random effect model was appropriate to examine the determinants of financial performance of commercial banks. Based on the research findings, Managerial Efficiency was found to have negative and significant impact on both ROA and ROE. While capital adequacy ratio was positive and statistically significant in explaining the variation in ROA but the relation between CAR and ROE was found to be negative. The other measure of credit risk, non-performing loan ratio is found to be insignificant in explaining the variation in both ROA and ROE. Bank size was positively and significantly correlated with ROA with a positive relationship while Cost per loan and Loan to asset ratio were negative and statistically significant in explaining the ROE of Ethiopian Commercial Banks. The impact of macroeconomic factors; i.e. real GDP growth and Inflation Rate, was found to be insignificant in affecting both financial performance measures.