FACTORS AFFECTING NON-PERFORMING LOANS IN EHIOPIAN BANKING SECTOR: SPECIFIC CASE OF COMMERCIAL BANK OF ETHIOPIA

Abstract

The notion of Non-performing Loans (NPLs) and its determinant factors have stayed center of study in the science of finance and economics over the last two-three decades. As the successes of banks largely depend on its NPL management, closely assessing the issue will have a paramount importance to the institutions. Commercial Bank of Ethiopia (CBE), the biggest bank in Ethiopia is implementing a number of systems to control the grave issue of NPLs, however the problem still persists. Claiming this fact several studies have been made to identify bank and customer specific factors affecting NPLs from study the effect of employees’ attitude towards the effectiveness of performance appraisal system comprehensively. The basic objective of this study was to identify factors affecting non-performing loans in Ethiopian banking sector; with specific case of commercial banks of Ethiopia. Explanatory research design and mixed research approach was applied to achieve this overriding objective of identifying bank and customer specific factors affecting NPLs. A multiple regression analysis was applied on the data collected from the selected sample using stratified sampling technique. Finally the data was collected using questionnaires, cleaned, coded in to and analyzed using SPSS V20. As per the findings of the study bankers’ incompetence, inadequacy of collaterals and lack of aggressive credit collection were found to highly affect the occurrence of NPLs. In addition borrower’s culture/orientation which is the dimension used for measuring customer specific also have a positive and significant effect on the occurrence of NPLs in the bank. Hence, it was concluded, as per employees who are working in the head office credit operation central processing center, that among the institution specific factors to affect NPLs bankers’ incompetence followed by inadequate nature of collaterals were the best predictor NPLs occurrence. Therefore, the top management of the bank should strongly work on developing technical and professional competence of credit performers through trainings and exposures. Additionally review its credit procedure and implement accordingly so as to improve the quality of loans.