Abstract:
The adoption of credit risk management is becoming a crucial factor for every commercial bank around the world. This study aimed at examining the impact of credit risk management on profitability of banks in Ethiopia. Other objectives included, to determine bank specific, Industry specific and macroeconomic factors that affect banks financial performance. This study is primarily based on both primary and secondary data for eight banks. The primary data was collected mainly through an interview. The relevant authorities were interviewed personally in order to have their views on the problems and solutions. The secondary data were obtained from various sources such as Annual Reports of the selected commercial banks, relevant articles, books and magazines, National Bank annual report and MoFED. In this study correlation and multiple regression analysis done with random effect model and EView software used to regress the data. Return on equity was dependent variable while nonperforming loan, capital adequacy, bank size, loan and advance to deposit ratio, inflation and GDP have taken as independent variables. As a result the study concluded that the credit risk which is measured by nonperforming loan ratio had a significant inverse impact on banks financial performance and capital adequacy also same impact on profitability. In addition, loan to deposit ratio and bank size have a positive significant impact on banks financial performance. In general, Bank Specific factors have a significant impact on banks profitability and also external factors both macroeconomic (GDP and INF) have a significant impact on profitability while industry specific factors (Interest Spread) have no significant impact in Ethiopia banks profitability.