Abstract
This study investigates the determinants of credit risk in Ethiopian commercial banks over the period 2017–24, using Loan Loss Provisions as a proxy for non-performing loans. Employing panel regression models, the analysis identifies value-added intellectual capital and capital adequacy as consistent, significant predictors of lower credit risk across banks with varying ownership structures. Larger bank size is associated with reduced credit risk; however, this relationship is largely driven by the dominance of a state-owned bank and weakens when the sample is restricted to private banks. Other bank-specific variables – management risk appetite, income diversification, and cost of inefficiency – exhibit no statistically significant effects. Among macroeconomic indicators, remittances are linked to higher credit exposure, while GDP growth modestly mitigates credit risk by strengthening borrowers’ repayment capacity. Trade openness and inflation appear to exert limited influence (Islam & Mia, 2023). Overall, the findings highlight the importance of intellectual capital efficiency, robust capitalisation, and ownership structure in shaping credit risk dynamics in Ethiopia’s banking sector. Policy implications include fostering intellectual capital development, maintaining adequate capital buffers, and supporting macroeconomic stability.
Keywords: Risk Management, Credit Risk, Risk Drivers, Non-Performing Loan, Loan Loss Provision, Risk Appetite, Remittance, Value-added Intellectual Capital
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