Financial Risks And Profitability Of Commercial Banks In Ethiopia

Commercial banks assume various kinds of financial risks which are related to thernfinancial operation of a business and arise due to the uncertainty in movement ofrnforeign exchange rates, interest rates, credit quality, and liquidity position. Risk mayrnhave positive or negative outcomes or may simply result in uncertainty. Therefore inrnorder to increase the return, banks should know which risk factors have greater effectrnon profitability. Thus, this study examines the impact of financial risks on thernprofitability of commercial banks for a total of eight commercial banks in Ethiopia,rncovering the period of 2000-2011. To this end, the study adopts a mixed methodsrnresearch approach by combining documentary analysis and in-depth interviews. Thernstudy reviews the financial records of eight commercial banks in Ethiopia andrnrelevant data on macroeconomic factors considered. The findings of the study showrnthat Credit risk and liquidity risk have a negative and statistically significantrnrelationship with banks’ profitability. However, the relationship for interest rate riskrnand foreign exchange rate risk is found to be statistically insignificant. The studyrnsuggests that focusing in credit risk management andrnkeeping optimal level ofrnliquidity which enables banks to meet their contractual commitments could maximizernreturn on assets of Ethiopian commercial banks

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