Bank Risk Management and Bank Performance: Evidence from the Ethiopian Banking Sector

The researchers studied the influence of risks on bank performance for commercial banks operating in Ethiopia. The bank’s performance was measured by return on assets, equity, and net interest margin. Risk management indicators include credit, liquidity, and operational risks, considered independent variables. The secondary data was collected and compiled from the annual reports of sampled banks and the National Bank of Ethiopia between 2009–10 and 2020–21. The researchers used fixed effects because of the concerns about potential individual-specific effects that could introduce bias into the estimates. Furthermore, the System Generalized Method of Moments was used as it was suspected that there were time-varying unobserved effects, endogeneity, or serial correlation in the errors. Credit and operational risk have a significant impact on bank performance. In contrast, the liquidity risk has an insignificant effect on bank performance. The researchers recommended that to enhance profitability, banks must strengthen credit risk management, adopt dynamic provisioning policies, and improve the overall quality of their assets. Moreover, the study suggests enhancing bank operational efficiency by investing more in technology, training workers, and implementing risk management systems necessary to increase bank performance.