Effect of Credit and Operational Risk Management Practices on Financial Performance of Ethiopian Commercial Banks

Purpose: This study examines the effects of credit and operational risk management practices on the financial performance of Ethiopian commercial banks, measured by ROA and ROE, while controlling for bank size and age. Methodology: A quantitative approach was employed, utilizing balanced panel data from 15 Ethiopian commercial banks spanning 2012 to 2022. Panel regression analysis was conducted using the random effects model for ROA and the fixed effects model for ROE, based on appropriate model selection criteria and diagnostic tests. Findings: NPLR has a significant negative effect on ROA (β = −0.0803, p = 0.001) and ROE (β = −0.6188, p = 0.035). CAR positively affects ROA (β = 0.0207, p = 0.013) but negatively affects ROE (β = −0.8489, p < 0.001). CIR negatively and significantly affects both ROA (β = −0.0094, p < 0.001) and ROE (β = −0.0717, p < 0.001). Bank age negatively affects ROA (β = −0.0172, p < 0.001) and ROE (β = −1.3341, p = 0.001), while bank size positively affects ROE (β = 0.1199, p = 0.002) but has no significant effect on ROA. Practical Implications: The findings indicated more rigorous credit appraisal and monitoring, enhanced cost efficiency, and optimal capital management. Additionally, regulators should strengthen risk-based supervision to improve banks' financial performance. Originality: This study offers comprehensive panel evidence on the combined effects of credit and operational risk management on the performance of Ethiopian commercial banks, thereby contributing valuable empirical data to the relatively under-researched literature on banking in Sub-Saharan Africa.