DETERMINANTS OF ASSET QUALITY: IN ETHIOPIAN PRIVATE COMMERCIAL BANKS

Abstract

According to Sharon (2007), loans have a vital contribution towards development of economy. However, its non-payment also leads to incidence of huge loss on banks in particular and country in general. Hence, this study was conducted to examine both bank specific like (loan to deposit ratio, capital adequacy ratio, return on asset, return on equity and efficiency ratio) and macroeconomic like (gross domestic product, lending rate, inflation rate), determinants of asset quality, the case of Ethiopian private commercial banks. To this end, the researcher has selected six senior commercial banks in Ethiopia by using purposive sampling method. This study used secondary sources of data, which is panel data in nature, over the period 2000-2016. These data were collected from NBE and CSA. Furthermore, fixed effect model was used to examine the determinants of asset quality. This research is an explanatory research design that identifies the cause and effect relationships between the asset quality and its determinants. The finding revealed as LTD ratio, efficiency ratio, gross domestic product, inflation had positive relationship and statistically significant impact on the level of asset quality whereas average lending rate capital adequacy and return on equity are negative relationship and statistically significant impact on the level of asset quality but return on asset is negative and insignificant effect on the level of asset quality of private commercial banks operated in Ethiopia. The finding of this study is significant since once identifying the determinants of asset quality might enable management body to make appropriate lending policies that prevent the occurrence of pure asset quality. Furthermore, the study recommended as bank managers should emphasize by increasing the negative significant effects of explanatory variable and decrease positive significant effects of variable to manage asset quality of Ethiopian private commercial banks.