DETERMINANTS OF NON-PERFORMINGLOANS IN ETHIOPIAN COMMERCIAL BANKS

Abstract

This study was conducted to examine determinants of NPLs of commercial banks in Ethiopia. To this end, the researcher has selected seven senior commercial banks in Ethiopia judgmentally. This study used secondary sources of data, which is panel data in nature, over the period 2004-2017. These data were collected from NBE, CSA and the banks itself. Furthermore, fixed effect model was used to examine the determinant of NPLs. This research is an explanatory research design that identifies the cause and effect relationships between the NPL and its determinants. Findings of the study show that Capital asset adequacy has positive and significant impact on NPLs. Bank size, Loan to deposit ratio have negative but they have significant impact on NPLs. The finding of this study is important since once identifying the determinants of NPLs might enable management body to make appropriate lending policies that prevent the occurrence of NPLs. The study recommended as bank managers better emphasize the management of loans by diversify their credit portfolio & calculating risk relative to its return in order to increase return on equity and to reduce the level of nonperforming loans. Also the study suggest for future researcher to validate the consistency of the result and provide additional results by including other variable such as borrower specific variables (Loan diversion, poor credit culture of customers and willful defaulting), priority sector loan, government macro policy like monitory policy and sensitive sector’s loan.