ASSESMENTS OF NON-PERFORMING LOANS: A STUDY ON SELECTED COMMERCIAL BANKS IN ETHIOPIA

Abstract

As noted by Sharon (2007), loans have a vital contribution towards development of economy. However, its nonpayment also leads to incidence of huge loss on banks in particular and country in general. Hence, this study was conducted to examine bank specific determinants of NPLs on selected commercial banks in Ethiopia. To this end, the researcher has selected six private commercial banks based on their experience in the sector where can give clear picture in the selected topic. Survey was conducted with professionals engaged in these private owned Banks in Ethiopia holding different positions using a self administered questionnaire. In addition, the study used structured review of documents and records of banks and in-depth interview of senior bank officials in these commercial banks. This study used secondary sources of data, which is panel data in nature, over the period 2010-2015 These data were collected from NBE and CSA. This research is an explanatory research design that identifies the cause and effect relationships between the NPLs and its determinants. The finding of the study shows that poor credit analysis and weak/inadequate follow-up was shared by all six private banks which cause non performing loan. Followed by economic condition, diversion of fund and Absence of wise & sound lending practice ascribe to the causes of loan default. The finding of this study is significant since once identifying the determinants of NPLs might enable management body to make appropriate lending policies that prevent the occurrence of NPLs. Furthermore, the study recommended as bank managers should emphasize the management of current assets and loans than fixed assets in order to reduce the level of nonperforming loans. Besides, it is better for the loan officers to provide financial counseling to the borrowers on the wise use of loan and also to make decision on timely fashion to meet their need.