DETERMINANTS OF NON-PERFORMING LOAN: THE CASE OF ETHIOPIAN COMMERCIAL BANKS

Abstract

The study aims to identify the major bank specific determinants of Nonperforming loans of state owned and private commercial banks of Ethiopia. To achieve this objective both descriptive and explanatory research design was used. Data has been collected mainly through primary source using questionnaire and interview from loan administrators and credit officers of both state owned and private commercial banks. Secondary data were also used by reviewing the annual reports directives and procedures issued by the banks and written material from internet. 1 state owned and 12 private commercial banks were selected by using purposive sampling based on their seniority and out of 190 credit department officials 117 (61.6%) staff were selected as a sample by using simple random sampling technique of lottery method. Out of 117 distributed questionnaires 108 of them were filled and collected. For data analysis descriptive statistics including mean, frequency, percentage and standard deviation were used and processed through computer loaded SPSS software. The result of the study shows that poor credit assessment, credit monitoring, credit size( aggressive lending, compromised integrity in approval, rapid credit growth and bank’s great risk appetite): lax credit terms ,and elongated process of loan approval were bank specific causes for the occurrence of nonperforming loans. To reduce the occurrence of loan default it is suggests that the bank should strengthen its applicant screening criteria and due diligence assessment to select potential risk taking applicants and adopt appropriate pre and post credit risk assessment. Besides the bank needs to make sure that borrowed funds are being used for the intended purpose through enhanced credit monitoring, borrowers’ credit culture, collateralized lending. And also it is better to revise and recheck the impact of their level of lending interest. The central government better to establish a comprehensive institutional frame work including: Asset Management company /AMC/.Banks better to develop clear and understandable and transparent procedural laws.