FACTORS AFFECTING OF NON-PERFORMING LOANS: IN THE CASE OF DEVELOPMENT BANK OF ETHIOPIA

Abstract

The rise of non-performing loan portfolios in banks significantly contributed to financial distress in the banking sector. Non-performing loans are the main contributor to liquidity risk, which exposes banks to insufficient funds for operations. The objective of the study is to examine the basic factors that affecting NPLs in case of Development Bank of Ethiopia. Sample for the study consists of 120 staff members who work in loan office census sampling was applied to obtain the data. Data were collected with the help of questionnaire and interview and analysed using the Statistic Package for Social Science (SPSS). The result from Pearson coefficients implies that the seven factors were all positively related with NPL within the range of 0.648 to -0.013. Findings from the multiple regression analysis depict, 67.1 % variation in NPL is explained by employed explanatory variables (where by R square is 0.671 and adjusted R square is 0.650). Pearson correlation table shows that Non-performing loan had most significant correlation with poor credit assessment, poor collateral strength, high interest, credit size, loan diversion, poor credit monitoring, and borrower’s credit culture respectively. The result of the study indicated that poor credit assessment, poor collateral strength, high interest, credit size and poor credit monitoring has positive and statistically significant effect on NPL. DBE higher management team should pay appropriate attention on bank specific, and borrower specific factors impact of NPL’s of priority sector of businesses loans and should be able to prepare prudential credit policies and procedure to protect adverse impacts of such type of non-performing loans. DBE should put in place a vibrant credit process that would encompass issues of proper customer selection, robust credit analysis, authentic sanctioning process, proactive monitoring and follow up and clear recovery strategies for sick loan.