The Impact of Credit Risk Management on Financial Performance of Commercial Banks in Ethiopia

This study delves into the intricate relationship between credit risk management strategies and the financial performance of commercial banks in Ethiopia. By analyzing data from 14 banks over a span of 13 years (2011-2023) using correlation and regression analyses in E-Views 12 software, the research sheds light on the impact of key indicators such as credit interest income ratio, loan to total deposit ratio, and loan to total asset ratio on financial outcomes. The findings reveal that while certain metrics positively influence financial performance, such as credit interest income and loan ratios, the presence of nonperforming loans exerts a negative impact on bank profitability, emphasizing the critical need for effective management of credit risks to ensure sustained financial health. In light of these results, it is recommended that Ethiopian commercial banks prioritize the enhancement of credit risk management practices, with a specific focus on strategies to address nonperforming loans. Strengthening credit analysis frameworks and refining loan administration processes are crucial steps towards safeguarding profitability and bolstering long-term stability within the banking sector. Policymakers and industry stakeholders are encouraged to collaborate in developing and implementing robust risk management frameworks that not only protect the financial viability of commercial banks but also contribute to the resilience and growth of the broader financial landscape in Ethiopia.