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Credit Risk Determinants in Selected Ethiopian Commercial Banks: A Panel Data Analysis

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  • Seid Muhammed

    (Doctoral School of Economic and Regional Sciences, Hungarian University of Agriculture and Life Sciences, Páter Károly u. 1, 2100 Gödöllo, Hungary
    Department of Accounting and Finance, College of Business and Economics, Salale University, Fitche P.O. Box 245, Ethiopia)

  • Goshu Desalegn

    (Doctoral School of Economic and Regional Sciences, Hungarian University of Agriculture and Life Sciences, Páter Károly u. 1, 2100 Gödöllo, Hungary
    Department of Accounting and Finance, Faculty of Business and Economics, Kotobe Metropolitan University, Addis Ababa P.O. Box 5563, Ethiopia)

  • Maria Fekete-Farkas

    (Szent Istvan Campus Institute of Agricultural and Food Economics, Hungarian University of Agriculture and Life Sciences, Páter Károly u. 1, 2100 Gödöllő, Hungary)

  • Emese Bruder

    (Szent Istvan Campus Institute of Agricultural and Food Economics, Hungarian University of Agriculture and Life Sciences, Páter Károly u. 1, 2100 Gödöllő, Hungary)

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.

Suggested Citation

  • Seid Muhammed & Goshu Desalegn & Maria Fekete-Farkas & Emese Bruder, 2023. "Credit Risk Determinants in Selected Ethiopian Commercial Banks: A Panel Data Analysis," JRFM, MDPI, vol. 16(9), pages 1-14, September.
    • Handle: RePEc:gam:jjrfmx:v:16:y:2023:i:9:p:406-:d:1237512
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    References listed on IDEAS

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    1. Ezekiel Oseni, 2023. "Assessment of the Five Cs of Credit in the Lending Requirements of the Nigerian Commercial Banks," International Journal of Economics and Financial Issues, Econjournals, vol. 13(4), pages 58-65, July.
    2. Maryem Naili & Younes Lahrichi, 2022. "The determinants of banks' credit risk: Review of the literature and future research agenda," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 334-360, January.
    3. Paulo V. Carvalho & José D. Curto & Rodrigo Primor, 2022. "Macroeconomic determinants of credit risk: Evidence from the Eurozone," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 2054-2072, April.
    4. IDOWU Abiola & Awoyemi Samuel Olausi, 2014. "The Impact of Credit Risk Management on the Commercial Banks Performance in Nigeria," International Journal of Management and Sustainability, Conscientia Beam, vol. 3(5), pages 295-306.
    5. Donjeta Morina, 2020. "Determinants of Credit Risk in Commercial Banks of Kosovo," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(2), pages 179-190.
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    Cited by:

    1. Islam Abdeljawad & Mamunur Rashid & Muiz Abu Alia & Rana Qushtom & Mahmoud Irshaid & Ahmad Sahyouni, 2024. "Cushion hypothesis and credit risk: Islamic versus conventional banks from the MENA region," PLOS ONE, Public Library of Science, vol. 19(7), pages 1-23, July.
    2. Seid Muhammed & Goshu Desalegn & Prihoda Emese, 2024. "Effect of Capital Structure on the Financial Performance of Ethiopian Commercial Banks," Risks, MDPI, vol. 12(4), pages 1-15, April.
    3. Chen Jiaxu, 2025. "Impact of Green Credit on the Performance of Commercial Banks: Evidence from 42 Chinese Listed Banks," Economics - The Open-Access, Open-Assessment Journal, De Gruyter, vol. 19(1), pages 1-15.

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