Credit Risk Determinants in Selected Ethiopian Commercial Banks: A Panel Data Analysis

Abstract

The study aims to investigate the factors that contribute to credit risk in Ethiopian commercial banks, considering both macroeconomic and bank-specific factors. The research utilized multiple regression models, a quantitative research approach, and explanatory research designs. A purposive sample technique was used to select 10 commercial banks for the study, and secondary data from audited financial reports were analyzed. The findings of the study reveal a significant positive relationship between credit risk and several variables, including bank size, profitability, efficiency, capital adequacy, and inflation. Conversely, there is an inverse relationship between credit risk and both loan growth and currency rates. Surprisingly, the study found that neither GDP nor interest rates have a significant impact on credit risk. Based on these findings, the study provides recommendations for Ethiopian commercial banks. It suggests maintaining adequate levels of capital, avoiding business in sectors influenced by inflationary pressures, carefully evaluating non-interest income, and adjusting lending policies as necessary. Furthermore, the study advises periodically examining the relationships between GDP growth, interest rates, and credit risk. It also emphasizes the importance of adapting credit risk management practices to changing market conditions and staying vigilant toward emerging trends.

Cushion hypothesis and credit risk: Islamic versus conventional banks from the MENA region

“…The extensive range of operations and products offered by large banks may result in a loss of control, thereby increasing the level of risk. Consistent with this view, Swami et al [ 51 ], and Muhammed et al [ 3 ] pointed out that bank’s size is positively linked with risks.…”

“…Thus, we expect low credit risk during high economic growth. However, Antony and Suresh [ 46 ] pointed out that GDP is positively associated with credit risk while Kharabsheh [ 54 ] and Muhammed et al [ 3 ] found that GDP has no significant impact on credit risk.…”

“…Agency theory explains that bank managers are obligated to disburse more credit to satisfy banks’ appetite to earn more returns for the owners and incentives for the managers. Therefore, larger banks with better profitability, liquidity, and capital reserves will find ways to disburse more credit [ 1 – 3 ]. Financially weaker banks must disburse credit to stay afloat, survive competition, and maintain going concern [ 4 ].…”

Effect of Capital Structure on the Financial Performance of Ethiopian Commercial Banks

“…To achieve this objective, quantitative research approaches and an explanatory research design were used utilizing a random-effect regression model conducted through Stata 14 software. According to (Muhammed et al (2023), Ethiopia is home to 29 commercial banks, with 27 being predominantly privately owned. Hence, given the lion's share of private banks in the nation's financial sector, and the recommendations of previous studies by Teshome et al (2018), Tekatel (2019), and Xu et al (2021) that highlighted the significant impact of capital structure choices on the financial performance of privately owned banks, this study exclusively focused on private banks.…”

“…Developing nations' banking businesses are particularly vulnerable to capital structure decisions because of their low equity-to-total asset ratios and stringent regulations (Sivalingam and Kengatharan 2018). Ethiopia's banking industry is crucial for the nation's economy, contributing more than 4.2% to the GDP and representing over 95% of the capital (Muhammed et al 2023;Tekatel 2019;Abate and Kaur 2023). Any disruption or failure in this sector would greatly impact the country's overall economic development.…”