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.