DETERMINANTS OF NONPERFORMING LOANS OF ETHIOPIAN COMMERCIAL BANKS

Abstract

This study examines the bank-specific and macro-economic determinants of Non-performing loans (NPLs) of commercial banks in Ethiopia. The study adopts a quantitative method research approach. The study uses a secondary data collected from national bank of Ethiopia of ten commercial banks in Ethiopia and relevant data on macroeconomic factors considered for the period from the year 2007 to 2014. Besides, fixed effect model was used to examine the determinants of NPLs. This research is an explanatory research design that identifies the cause and effect relationships between the NPLs and its determinants. The findings of the study show that, return on equity, average lending rate and inflation rate have negative and statistically significant relationship with banks’ NPLs. On the other hand, Loan to deposit ratio has a positive and statistically significant relationship with banks’ NPLs. However, the relationship for gross domestic product and nonperforming loan found to be statistically insignificant. The study suggests that focusing the banks alongside the key drivers of NPLs could reduce the probability of loan default in Ethiopian commercial banks. Furthermore this study suggests commercial banks to have updated a detailed credit procedure which considers the current macroeconomic factors and the market situations as a whole