DETERMINANTS OF NON-PERFORMING LOAN: A CASE OF DEVELOPMENT BANK OF ETHIOPIA

Abstract

This study was conducted with an objective of identifying the determinants of nonperforming loan in DBE during the period of 1991 to 2018. The study has used NPL as dependent variable and ROA, asset size of the bank, amount of loan, real interest rate, GDP and inflation as independent variables. The stationary behavior of variables included in the model is tested using ADF test, and the test result showed all variables were stationary either at level or first difference. The study used the Autoregressive distributed lag (ARDL) model and bounds testing procedure to examine the presence of long-run and short-run relationship among dependent and independent variables. The result of short run estimation shows that all bank specific and macroeconomic variables are significant at significance level of 1% and 5%. But the result of long run estimation showed that asset size of the bank, loan deposit ratio and real interest rate are statistically significant. ROA, GDP and inflation are not significant in determining NPL in DBE in long run. The bank expansion, loan provision and interest income are resulting on higher non-performing loan. the bank is recommended to improve loan management during the expansion of the bank asset, focusing on loan collection not only loan provision and manage the interest rate expansion through consideration of development activity.