Risk Measurement and Profitability in Ethiopian Commercial Banks

Robindro Singh Nongmaithem, Abdella Kossa, Idris Mohammed

Abstract


Abstract

To survive in modern market, banks should have effective measurement of risk since banking risks have impacts on profitability of the sector. Good measurement of banks risk index (a measure of amount of risk) indicates good risk management which leads to good profitability. Therefore, the purpose of this study is to investigate the impact of different risk factors on banks risk index and to identify the relationship profitability and risk measures in Ethiopian banking sector. Samples of eight banks were selected using judgmental sampling technique. Secondary data for seven years which is obtained from each banks annual report was analyzed quantitatively through descriptive, correlation and linear regression analysis. The result indicates that the banks are in a good position in managing risks with some variation between them. Credit and liquidity risk significantly negatively affects banks risk index while operating efficiency and capital adequacy ratio significantly positively affects banks risk index. Credit risk, capital adequacy ratio, and risk index have strong relationship with banks profitability measures. In addition credit risk, liquidity risk, and operating efficiency have high impact on risk index of the banks. Thus, the management bodies of the banks should consider these areas of risks in order to improve their banks risk level.

Key words: risk, profitability, credit, liquidity, risk index, and interest rate


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ISSN : 2251-1547