Determinants of Credit Risk & Its Management Commercial Banks in Ethiopia

Commercial banks, nowadays offer a large number of financial products and services in the market and among these products and services, lending is their main activity generating income. By performing this activity among other risky activities the bank is associated with numerous risks, where credit risk is listed first .Credit risk has always been a vicinity of concern not only to bankers but to all in the business world because the risks of a trading partner not fulfilling his obligations in full on due date can seriously jeopardize the affairs of the other partner and the ability to manage it effectively determines banks’ stability. Thus, this study examines the determinants and management of credit risk of commercial banks in Ethiopia. The study includes ten commercial banks over the period from 2010 to 2019. The study also used mixed research approach which comprises the documentary review and in depth interviews. Results using fixed effect panel regression exhibited that, Management efficiency, bank liquidity ,Bank profitability, capital adequacy ,operational inefficiency and inflation have negative and statistically significant effects on banks credit risk. On the other hand ,variables like state loan to deposit , Operational expense, gross domestic and unemployment rate have positive statistically significant effects on banks credit risk. Based on the findings, the study suggests that focusing the banks alongside the key derivers of credit risk could reduce the probability of loan default in Ethiopian commercial banks. .In addition the findings show that there are problems in credit risk management since the measurement of credit risk ,the controlling activities and contingency planning and information system were not adequately implemented. It is recommended that commercial banks should continue to diversify their lending activities to productive sectors. Thus, The overall findings indicates both macroeconomics and bank specific factors do have significant effects on credit risk.