Effect of Banks’ Efficiency on Credit and Liquidity Risks Evidence from Ethiopian Commercial Banks

Abstract

The purpose of this study is to examine the impact of bank efficiency on the credit and liquidity risks of commercial banks in Ethiopia. The panel dataset of 17 commercial banks over the period 2014-2022 was employed. The study employed the fixed effect regression model to estimate the impacts that the overall technical efficiency (OTEBC) and the pure technical efficiency (PTEBC) have on credit and liquidity risks. Our findings, based on 153 observations, explain that higher bank efficiency is significantly influencing credit risk, as identified by positive signs of both OTEBC and PTEBC. Specifically, efficient banks experience a lower return on average assets (ROAA) and market share; hence, a trade-off exists between efficiency and risk. Regarding the liquidity risk, both OTEBC and PTEBC are positively correlated, reflecting that efficient banks manage their liquidity more suitably. In addition, it is also determined that some macroeconomic factors, like economic growth and inflation (CPI), significantly affect these risks. The findings highlight that bank efficiency is a two-edged sword in managing risks and financial stability. These results, therefore carry important implications for policymakers and bank managers in their efforts to make the banking sector more resilient.