THE RELATIONSHIP BETWEE NON -PERFORMING LOAN AND FINANCIAL PERFORMANCE THE CASE OF COMMERCIAL BANK OF ETHIOPIA-HEAD OFFICE

Abstract

The objective of this study was to examine the relationship between non-Performing loan and financial performance of Commercial Bank of Ethiopia. The study variables were Size, Cost, Collateral and Age of Non-performing loan as Independent variable and profitability indicators Return on Asset (ROA), Return on Equity (ROE) and Net Interest Margin (NIM) as dependent variable. The study used quantitative research approach and secondary financial data for the period covering 2012-2019 since implementation of core banking system to examine the financial impact of non-performing loan on bank’s performance. Descriptive and explanatory research design was employed and data were analysed using descriptive statistics and multiple linear regression models by using SPSS version 23 software. Before analysing the study data, the reliability of the main items of the data was tested by using Cronbach’s alpha and 0.800 value obtained which is greater than the acceptable value 0.7.Regression assumption test were also undertaken to evaluate the association of the study variables. The finding of the analysis result has shown that there was significant relationship between explanatory and outcome variables during the study period. Based on the analysis result the researcher further recommended Commercial Bank of Ethiopia to enhance current lending practice through hiring consultant who have special expertise on major priority areas like Agriculture, Manufacturing and able to provide expert advice before the bank is going to finance. And to protect the bank from financial risk the researcher also recommended credit management to continue strengthening its monitoring mechanisms through regular follow up strategies and commitment, CRM to provide advices, counselling to borrowers to protect customer from business failure and the management also to provide training to all credit performers to improve their business knowledge so that the bank will reduce the size of non-performing loan and in effect will improve its financial performance.