DETERMINANTS OF NON-PERFORMING LOANS IN ETHIOPIAN COMMERCIAL BANKS

Abstract

With the growth of an economy, the banking industry expands and the competitiveness becomes intense with the increased number of banks in the economy. Nevertheless, its non-payment also leads to incidence of huge loss on banks in particular and country in general. Therefore, this study aimed to examine the determinants of non-performing loans in commercial banks of Ethiopia based on panel data analysis on the time period from 2010 to 2019. The study targeted ten high incomes and profit performance of commercial banks. It fundamentally covered a panel data of Awash bank, Dashen bank, Abyssinia Bank, Cooperative Bank of Oromia, Nib International bank, Lion Bank, Oromia International Bank, Wegagen bank, Zemen Bank and United bank. This study utilized both descriptive and econometric analysis based on a panel data to examine the determinants of non-performing loans. The data was mainly analyzed by using multiple regression model. The finding of the analysis of NPLs shows a downward sloping of NPLs of commercial banks in Ethiopia over the time of study. This study found that inflation rate has a negative significant effect on NPLs, but, loan growth, lending rate and operational efficiency have a positive and significant effect on NPLs. Thus, NPL is an indicator of the health of the banking system within a country and hence the economic health of that country, both in the short term and in the long term due to its implications for investment. These results have significant implications for banking stability in Ethiopia, and the role of macroeconomic policies in this regard. Hence, the study suggests that the credit policies of the commercial banks should be integrated with the profitability objectives of the commercial banks and sound credit culture should be introduced.