ASSESSMENT OF THE CAUSES OF NON-PERFORMING LOANS IN DEVELOPMENT BANK OF ETHIOPIA

Abstract

research conducted to analyze the causes of nonperforming loan (NPL) in Development Bank of Ethiopia and assessed the major bank specific (Credit monitoring, Credit assessment) and non-bank specific (customers orientation or attitude towards non-performing loan and others like macroeconomic, marketing factors and political instability) causes towards NPLs in DBE. The data for the study was collected from primary and secondary sources. Primary data was collected using both structured and open ended, subjective questionnaires from seventy nine (79) staffs and customers of the bank from both head office and Addis Ababa district, census used to determine the sample and collect primary data as well as secondary data of five years NPL ratio collected from annual loan portfolio report and planning report of the bank to illustrate the incremental rate of non-performing loan of development bank of Ethiopia. Descriptive statistics were used to analyze and examine the collected data. The results indicated that among the bank specific factors that accounted for the incidence of NPLs, poor credit monitoring/follow up is the major cause of NPL in DBE and Inefficient/improper know your customer assessment of the bank, Poor credit appraisal, and poor credit advice and consultancy of customer ranked second, third, and fourth, respectively as the cause for the occurrence of the NPL in DBE. In addition customer’s related causes that the result showed diversion of loan fund, knowledge and experience of customers about project management and weak project management capacity of the borrowers were the major factors of NPL in DBE. Moreover other factors discussed with respondents through open ended subjective questions and found poor credit monitoring, political instability, credit culture of customer’s, macroeconomic factors and marketing factors causes accumulation of bad loan. Generally the researcher believes the conclusion and suggestion of the study will be essential for the Bank and its credit units, credit policy reviewers and credit decision makers and for other financial institutes.