DOI: 10.11648/j.ijfbr.20261204.12 ISSN: 2472-2278

The Effects of Bank Credit Risk and Liquidity on Bank Profitability in Sub-Saharan Africa: Evidence from a Dynamic Panel Model

Tesfaye Gofe, Amsalu Beyene
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In a highly competitive banking business environment of today, it is essential to maintain the bank's profitability to remain in the business and contribute towards a country's financial development. In this regard, this study tries to identify the role of banks' credit risk and liquidity status on their profitability. This study used a two-step GMM dynamic panel model to analyze the effects of bank credit risk and Liquidity on the profitability of banks using data obtained from 36 selected Sub-Sahara African countries from 2000 to 2020. The regression results prove the significant effect of risk and liquidity factors on banks' profitability. Specifically, bank credit risk adversely affects profitability, whereas liquidity affects the bank’s profitability positively. The control variables included in the model show mixed results, with trade openness indicating a significant adverse effect on profitability. Others, such as inflation, and financial openness, negatively affected banks' profitability. The implication of this study is that it is crucial for policymakers and bank managers to design effective credit risk management strategies to maintain bank profitability, stay competitive, and thereby contribute to the overall development of the financial sector in the study area.

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