Effect of Credit Risk and Operational Risk on the Financial Performance of Commercial Banks in Tanzania.

Mrindoko, Allen Emmanuel (2021) Effect of Credit Risk and Operational Risk on the Financial Performance of Commercial Banks in Tanzania. Doctoral thesis, The Open University of Tanzania.

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Abstract

Banks worldwide suffered sharp credit losses in their loan portfolios leading to forceful mergers and acquisitions and revoking the licenses of some banks due to ineffective credit risk and operational risk management practices. These occurrences impede the level of financial inclusion and reduce public confidence in the financial system as a whole. This study assessed the effect of credit risk and operational risk on the financial performance of commercial banks in Tanzania. The study employed an explanatory research design and positivism philosophy culminating in a purely quantitative approach using only secondary panel data from 2006 to 2019. The collected data from 41 commercial banks with 264 observations were analyzed using STATA through descriptive statistics, generalized linear model, and structural equation modeling. The findings show that LTDR, LADLR, and EXCHR had a positive significant impact on ROA and ROE. Furthermore, OER, CIR, PCL, LGR, and GDP growth rate had a negative significant relationship with bank performance. On the contrary, NPLR, CAR, and inflation rate were statistically not significant with bank performance. The semi structural modeling results have indicated that both operational risk and credit risk negatively impact bank performance. The results extended further the theory of asymmetric information and credit risk theory. The study concluded that commercial banks faced moderate risk in the lending business but the profit tends to increase with the increase in risk. So, the lending business in Tanzania is both risky and profitable. This investigation recommends that commercial banks take proper management of their operational risk by diversifying their investments into portfolios that will yield return and decrease their leverage Keywords: Bank,Credit risk, Operational Risk, Bank Performance.

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