| Abstract: | Non-performing loans have been widely used as a measure of asset quality among lending
institutions and are frequently related with failures and financial crises in both developed and
developing countries. Any financial realities of a bank that result from a direct or indirect
advance of funds or commitment to advance funds to a person and are contingent upon that
person's obligation to repay the funds either on a specific date or on requests, typically with
interest, are referred to be loans. To date, no bank crises have occurred in Ethiopia as a result of
non-performing loans, but there is an indicator of significant NPLs in the country, which may
lead to that direction if not handled on time. The aim of this study was to assess the major factors
that affect non-performing loans financed by Wegagen Bank. The study was obtained from the
five ( four districts of Wegagen bank representative sites, east, west, north and south districts and
head office). Accordingly, 58 representative samples were selected and 56 of them were
responded to the questionaries‟ distributed. 12 interviews were planned and 11 of the interviews
were successful. The findings indicated that, poll had a 96.55% response rate, while the
interview had a 91.6% success rate. All respondents had more than or equal to five years of
credit-related job experience, and interviewers have more than 10 years of credit-related
experience on average, in addition to their other banking experiences. The result revealed that,
opinions of experienced credit personnel and interview respondents, non-performing loans are an
issue in Wegagen bank and can be caused by both internal and external sources. Internal factors
such as weak credit analysis, poor credit monitoring, inadequate risk management, lenient credit
policy, unfair competition among banks, borrower integrity (loan diversion), poor credit culture,
shareholder influence, and high risk appetite. Loan growth and bank size (in terms of deposit and
total asset) have no or very little link with the frequency of NPLs. The findings also suggested
that non-performing loans had a detrimental impact on bank performance in terms of credit
constraint and profitability. It was observed that a rise in non-performing loans reduced bank
profitability as well as the amount of credit available to the needy. Despite management's efforts
to minimize nonperforming loans, the volume of problem loans continues to grow, even if the
ratio appears to be reducing in some of the banks assessed. |
