Determinants of Non-Performing Loan in Development Bank of Ethiopia

Abstract

This study aimed to investigate the explanatory power of macroeconomic and specific variables as determinants of NPLs. The study used time series data of NPLs and eight macroeconomic variables over the period of 1980-2016 and cross sectional data of NPLS and specific variables for Bank specific, borrower related and external factors. Multivariate time serious model of vector auto regressive and vector error correction model was used and Johansen approach was applied to test the explanatory power of macroeconomic variables as determinants of NPLs for the time series data and OLS model for cross sectional data. For cross sectional data collection stratified sampling technique employed to determine sample size. The study proved significant negative association of real interest rate, DBE credit growth, and export with amount of non-performing loan in Development Bank of Ethiopia in the long run. Whereas, the variables GDP growth, foreign direct investment, and average exchange rate has a significant positive association with the amount of non-performing loan and there is negative relationship between the DBE credit growths. In addition to macroeconomic variables the specific variables such poor due diligence assessment, insufficient grace period given by the Bank for the repayment, non-credit worthy project financing, financing second hand machines, lack of proactive measurement for the sign of default, willful default, rent seeking character of borrowers, poor financial record system of borrowers, misfortune of borrower, change of policy in the economic system, unavailability labor force in the project area, saturation of demand for the product of the project, remoteness from market, and unsuitable agro-ecological condition are explanatory variables that increase or significantly impact the occurrence of NPLs projects in Development Bank of Ethiopia. In order to minimize the impact of NPLs Development bank of Ethiopia should develop a framework to assess macroeconomic variables, internal factors and external factors for stability and soundness of the bank.