Impact of Credit Risk Management On Profitability of Selective Private Commercial Banks in Dire Dawa
Year: 2025
Type: article
Abstract: In a banking set up, loans and advances account for the largest portion of interest-bearing assets held and as such they can also carry the greatest amount of potential risk to the Bank's capital account. That is why it is said that asset quality and loan quality are two terms with basically the same meaning in banking industry. It is obvious that whenever the loan portfolio increases the task of recovering all loans and advances faces challenges which leads to the weakening of the quality of assets of the bank. Therefore, strong credit risk management for building quality loan portfolio is of paramount importance to healthy performance of commercial banks as well as overall economy. Since a large chunk of banks revenue accrues from loans from which interest in derived, managing credit risk plays important role for their profitability. Accordingly, the object of the study is to examine the “Impact of Credit Risk Management on Profitability of Selected Private Commercial Banks in Dire Dawa’’ The study has taken five private banks out of the 16 private commercial bank of Ethiopia which the sample constitutes 31%. These banks are Wegagen Bank S.C, Dashen Bank. S.C, Awash Bank S.C, Bank of Abyssinia and United Bank S.C. The study used to measure the profitability of the bank as result of credit risk management from secondary data collection of five-year consecutive audited financial statement of the selected five private commercial banks. Primary data has gathered through structured questionnaire and personal interview from 20 individuals in related to qualitative information from District Manager, Branch Manager and employee involving on credit operation having ample experience in relation to loan processing and follow-up for the purpose of relevant data by using judgmental sampling method. Using secondary data multiple regression analysis method used to analysis the relationship between the variable of ROA (Return on Asset) indicator of profit as dependent variable and indicator of credit risk as independent variables which are Capital adequate (CA), Loan and Advance (LA), Loan loss Provision ratio (LLPR) and Liquidity ratio (LR). The result shown capital adequate, loan & Advance have positive and significant relationship but Loan loss provision and liquidity have negative relationship with ROA. Reducing loan loss provision helps to decrease credit risk of the banks. Good liquidity position shows the capacity to lending and good portfolio position. Therefore, management should implement proper adherence bank policy and procedure while processing loan and also the NBE’s rule and regulation during the process and after disbursement, since it reduce non-performing loan/Loan Loss Provision and also proper credit risk management to increasing liquidity position and capital adequate.
DOI: 10.20372/nadre:19626
Author: Tigist Ababu
Language: English
Subfield: Accounting
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W7090860811
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