DETERMINANT OF DEFAULT IN PROJECT FINANCING IN DEVELOPMENT BANK OF ETHIOPIA: PERCEPTION OF CREDIT EXPERTS

Abstract

This study identifies the determinants of loan default for project financing in the case of Development Bank of Ethiopia from the credit experts view point. In order to fulfill the stated objective an explanatory research design with quantitative data approach was used. The collected data were taken from performers and senior credit officials in DBE who directly involve in project financing process from beginning to end at 2017. In order to obtain more insight on the cases, the open ended questioner was taken. The variables used in the study are policy induced attributes, source of equity contribution, credit evaluation criteria of the bank during project appraisal and nature of the commodity factors assessed. In the study, probit regression model and E-view was used to identify variables which determine loan default. Based on the questioner collected from 122 purposively selected employees of DBE and run by the probit regression and correlation analysis assessed the relationship between loan default and the independent variables. The study funds that policy induced attributes and credit evaluation criteria during project appraisal have a significant and negative impact on the loan default in project financing which was consistent with the Researcher’s expectation. While source of equity contribution and nature of commodity attributes was found to have no significant contribution of loan default. The findings reveals that the credit evaluation criteria such as DBE’s credit project appraisal and evaluation parameters don’t genuine for the realization of the project, the commodity research data are not reflect realistic facts, the project appraisal financial projections are exaggerated and unrealistic, and finally there is no prudent lending practice in the bank, were statically significant determinant of loan default performance of DBE’s financed projects. Thus ,the bank better to reconsider the bank’s policy to reduce the level of nonperforming loan percentage to the single digit, the bank should critically appraise the feasibility of the agricultural and industrial projects before financing and also strong follow up is required after financing, the credit evaluation criteria unit of the bank (i.e. research directorate of the bank) better to be outsourced and detail parameters genuinely set by independent professional researchers and the bank should better halt to finance project by relocating second hand machineries from abroad