Assessment of the Impact of Credit Risk on the Financial Performance of Listed Commercial Banks in Tanzania

Abstract

This study explored the impact of various financial and risk management factors on the financial performance of commercial banks in Tanzania between 2017 and 2024. Specifically, the research addresses four primary questions: To what extent do non-performing loans (NPLs) affect the financial performance of commercial banks in Tanzania? What is the effect of capital adequacy on financial performance? How does a firm's size impact financial performance? And what is the impact of the debt-to-equity ratio on financial performance? The study employed a descriptive research design; the study utilized secondary data sourced from annual reports of the listed commercial banks. Descriptive statistics, correlation analysis, and multiple regression were used to analyze the data, but because panel data were used, the Hausman test was also used to decide whether or not the use of a random effect model or a fixed effect model would yield more accurate results. The analysis focuses on the effects of NPLs, capital adequacy ratio (CAR), firm size (F_SIZE), and debt-to-equity ratio (DER) on return on equity (ROE). Findings have revealed a non-significant positive relationship between NPLs and ROE, suggesting that factors beyond NPLs predominantly influence profitability. Firm size exhibits a marginally positive yet inconclusive impact on ROE, while DER demonstrates complex leverage effects. Additionally, CAR shows a negative but insignificant effect on the balance between financial stability and profitability. The research highlights the importance of addressing credit risk management within the Tanzanian banking sector, given its unique regulatory and economic challenges. Recommendations include adopting advanced credit risk assessment tools, improving asset quality management, effectively leveraging economies of scale, and implementing regulatory reforms to foster innovation and strengthen risk management. These strategies are aimed at improving the financial resilience and sustainable growth of commercial banks in Tanzania's competitive financial landscape