CREDIT RISK AND COMMERCIAL BANK PROFITABILITY IN RWANDA.

This study carried out an empirical analysis on credit risk and commercial bank profitability in the Republic of Rwanda over the period 2006-2015 quarterly basis, this study investigates the co-integration and causal relationship between the credit risk indicators that is non performing loans (NPL) Loan loss provision (LLP) and Capital adequacy ratio (CAR) together with macro-economic variables such as inflation,(CPI),gross domestic product (GDP) and interest rate as a moderate variable to the commercial bank profitability/performance measured by ROA (return on asset), ROE (return on equity) and NPM (net profit margin).The analysis employs Augmented Dickey Fuller (ADF) test, Johansen’s co integration test, Granger causality test and other tests over the study period, the relationship between the variables under study are examined, the results have found evidence that the variables are co-integrated. In addition to this, our findings show that credit risk indicators, macro economic variables used in this study are negatively and positively related to the banking performance measured by its selected indicators to one way or otherwise based on the magnitudes estimated in the study. However this study revealed that an increased exposure to credit risk reduces bank profitability, therefore, the banks should adopt an aggressive deposit mobilization to increase credit availability and develop a reliable credit risk management strategy with adequate punishment for loan payment defaults.