DETERMINANT FACTORS AFFECTING OF CREDIT RISK MANAGEMENT OF SELECTED COMMERCIAL BANKS IN ETHIOPIA

Abstract

The problem of the study shows that various banks suffer from many types of banking risk. This has significantly affected banks’ profits. The main aim of the study was to identify the determinant factors of credit risk management. The study used mixed research approach. The secondary data collected in commercial banks of Ethiopia from 2007 to 2016.A fixed effect model was employed to identify the effects of independent variables.. The dependent variable, credit risk ratio, was measured by loan loss provision which was the best one to measure and indicate the effectiveness of the credit risk management of a bank. Independent factors were efficiency ratio, return on equity after tax, net interest margin, loan and advance, GDP growth rate, age of the bank, spread, inflation rate, total asset and operation ratio. Return on equity after tax, total asset and age of the bank were negatively correlated with loan loss provision whereas loan and advance and operation ratio were positively correlated to loan loss provision The skill, perception, opinion and experiences of the loan officers influenced the credit risk management systems in Ethiopian commercial banks. The level of nonperforming loans indicated the loans quality and credit risk management of a bank. The low proportion of non-performing loan linked with the strengths of credit risk management. The study recommended that the central bank should increase their oversight on the credit granted by the commercial banks. Also, the commercial banks should establish a department of risk management, and make diversifications in the credit facilities so as to reduce the credit risk.