DETERMINANTS OF NONPERFORMING LOAN: EVIDENCE FROM PRIVATE COMMERCIAL BANKS IN ETHIOPIA

Abstract

Banks role in the economy of any country is very significant. Lending is risky in that repayment of the principal loan plus interest is not always guaranteed. High levels of Non-performing Loans is as a result of failure to manage loans, this would likely affect the performance of Banks and the country’s economy at large. In reference to private commercial banks in Ethiopia reports from 2002-2017 there was a decrease in NPLs between the studied period. Though there has been some decline in NPLs, the figures still remain high. The study seeks to fill the existing research gap by conducting a study to fixed effect model non-performing loans of private commercial banks in Ethiopia. Non-performing loans in Ethiopia from the empirical evidences that help answer the research objective. Secondary data from National bank of Ethiopia for 16 years period was used. The data that was collected in the study was quantitative. Regression analysis was used to analyze the data and find out whether there exists a relationship between bank specific factors and macro-economic factors in Private Commercial Banks in Ethiopia. In this research fixed effect model was used to link and assess the joint relationship between Nonperforming loan ratio and its determinants of Private Commercial Banks in Ethiopia. The study found out that there was a significant negative relationship between gross domestic product, exchange rate, bank size , loan to deposit and return to equity with non performing loan of private commercial banks in Ethiopia. The relationship between Lending rate, unemployment and capital adequacy with non-performing loans were found to be positive.