Determinants of Nonperforming Loan: An Empirical Study on Commercial Banks of Ethiopia

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Addis Ababa University


Banks while making profits, encounter several risks. Nowadays, one of the most important risks is default risk, which leads to increase in non-performing loans (NPLs). As the lending process affects not only the banking activity, but also the development process, risks should be avoided as much as possible. The current study investigated the Determinants of Nonperforming Loan in Ethiopian Commercial Banks. The study aimed to test and confirm the effectiveness of common commercial banks non-performing loan determinants and how it affects the level of nonperforming loan in Ethiopia commercial banks during the past ten consecutive years. Balanced fixed effect panel regression was used for the data of eight commercial banks (two public owned and six private owned banks). The study period covered from 2004 to 2013. Seven factors (four bank specific and three macroeconomic factors) affecting banks nonperforming loan were selected and analyzed. The results of balanced fixed effect panel data regression analysis showed that deposit rate, loan to deposit ratio and lending interest rate had positive and significant impact on banks nonperforming loan. According to the regression result lending interest rate is a very important determinant of nonperforming loan in Ethiopia banking industry. Cost efficiency had negative and significant impact on banks nonperforming loan. Bank solvency ratio and gross national product (GDP) growth rate ad inflation rate had negative and statistically insignificant impact on banks nonperforming loan. The study then suggests that banks loan officers should constantly monitor each borrower’s circumstances to detect loan problems before they become uncorrectable. Key words: commercial banks, loan and advance and nonperforming loan



Commercial banks; loan and advance and nonperforming loan