Determinants of Credit Risk and Its Management in Case of Wegagen Bank S.C

This study endeavors to analyze the determinants of credit risk and its management in Wegagen Bank in Diredawa. The research inquiries concentrate on the impact of inflation, corporate competition, financial sector development, Return on assets, loan-to-deposit ratio, as well as credit risk management practices and techniques in Wegagen Bank. The study employs balanced panel data and collects secondary data from Wegagen Bank, Branches operating in Diredawa from 2013 to 2022. Additionally, the researcher employs a structured questionnaire to evaluate credit risk management practices and techniques in Wegagen Bank. The research utilizes both qualitative and quantitative research methods, obtaining data from primary and secondary sources. A survey questionnaire is devised and pre-tested to gather primary data from credit professionals and managers using the census method. Multiple regression models are employed to identify the impact of explanatory variables on credit risk. The findings reveal deficient credit risk management practices within the bank. This deficiency can be attributed to insufficient information systems supporting risk management processes, a lack of risk identification tools focusing on customer activities and related environments, as well as lending activities. The study also highlights unfair conditions related to credit assessment and processing activities, a lack of accountability, and inadequate data concerning non-loan making activities. Furthermore, the substantial concentration of loans directed towards industries, products, geographies, and significant borrowers poses a notable limitation to the bank's credit risk management endeavors. The research findings also indicate that inflation significantly and positively affects credit risk. To effectively manage macroeconomic factors, the study recommends that executives at Wegagen Bank adopt a more adaptable approach. For instance, during periods of low inflation, increasing loan loss provisions is advisable, while reducing loan loss provisions is recommended during high inflation. Moreover, the study reveals a significant and negative correlation between financial sector development (FSD), firm competition (FC), loan-to-deposit ratio (LDR), and the profitability of Wegagen Bank in Ethiopia. Therefore, it is suggested that the bank establish a well-organized management information system capable of scientifically assessing, monitoring, and controlling risks. Additionally, primary attention should be given to mitigating inflation rate risks, and a set of rules should be developed to proactively oversee ethical standards and apply policies prudently.