Determinants of Nonperforming Loan: An Empirical Study on Commercial Banks of Ethiopia
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Date
2015-02
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Addis Ababa University
Abstract
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
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Keywords
Commercial banks; loan and advance and nonperforming loan