A THESIS SUBMITTED TO THE DEPARTMENT OF ACCOUNTING AND FINANCE, SCHOOL OF GRADUATE STUDIES, ARBA MINCH UNIVERSITY IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE IN ACCOUNTING AND FINANCE

Abstract

The study aimed to examine factors that determine the credit risk of private commercial banks in Ethiopia. The analysis was based on a panel date from 2011 to 2020 period. Purposive sampling was used to determine the sample size. Those banks that were established before 2009 were included in the sample to keep homogeneity among banks in terms of age. A mixed research approach was used to collect and analyze data. A secondary source was used for both quantitative and qualitative data. The quantitative aspect was analyzed based on multiple regression econometric model. Nine independent variables were included in the econometric model of the study. The qualitative aspect also used reports of banks, NBE and recent empirical studies to supplement the quantitative findings. Qualitative issues such as the regulatory environment, information asymmetry, credit risk management practice, and the ongoing political unrest and COVID 19 pandemic were used as points of qualitative analysis of credit risk.The finding of the study indicated that credit growth, profitability, GDP rate, inflation rate and interest rate significantly affected credit risk with positive relationship for the period under study whereas operating efficiency and exchange rate significantly and negatively affected credit risk. Qualitative analysis of the regulatory environment, information asymmetry, credit risk management practice, and the ongoing political unrest and COVID 19 pandemic showed that at least part of the quantitatively unexplained part of the econometric model can be attributed in some respect to these qualitative factors. Given the significant variables, therefore, banks should continue to adhere to credit risk policies and strategies of their own and the guide lines from NBE, including responsiveness to the macroeconomic environment. NBE and government required to frequently update and respond to the macroeconomic environment for the health of the banking industry