Determinants of Non-Performing Loans: Evidence From Selected Private Commercial Banks in Ethiopia
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Date
2026-06-02
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Addis Ababa University
Abstract
This study investigates the determinants of non-performing loans (NPLs) in selected private commercial banks in Ethiopia using panel data from 2020–2025. Ten banks were analyzed: Awash, Dashen, Bank of Abyssinia, Cooperative Bank of Oromia, Wegagen, NIB, United, Bunna, Abay, and Zemen, yielding 60 bank-year observations. A quantitative approach was employed, applying Panel Least Squares regression with robust standard errors. Diagnostic tests confirmed the absence of multicollinearity, heteroskedasticity, autocorrelation, and violations of normality assumptions. Results show that both bank specific and macroeconomic variables affect NPL with Net interest margin and GDP growth exert negative and significant effects on NPLs, while loan growth and loan-to-deposit ratio are positively associated. Firm size and management efficiency are insignificant, inflation is positive but insignificant, and lending rate is negative and significant. The model demonstrates strong explanatory power with R² = 0.9883. Policy implications suggest private banks should cap annual loan growth at 20 percent and set loan-to-deposit ratio alerts at 85 percent. High net interest margin should be treated as a positive indicator. The National Bank of Ethiopia should jointly monitor loan growth, loan-to-deposit ratio, and GDP; link provisions to loan growth above 15–20 percent, and apply interest rate policy cautiously. Bank management should align incentives with NPL performance while maintaining cost controlr
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Keywords
Non-Performing Loans, credit risk, commercial banks, Ethiopia, panel data, profitability, loan growth, GDP, interest rate