Determinants of Non-Performing Loans: Evidence from Commercial Banks in Ethiopia

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Date

2017-06

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Addis Ababa University

Abstract

This study examined the bank-specific and macro-economic determinants of Non-performing loans (NPLs) of Ethiopian commercial banks. The study adopted a quantitative research approach. The study uses data collected from the National Bank of Ethiopia, Central Statistical Agency and financial statement of nine commercial banks. Data covers the period from 2006-2016. Descriptive and multiple regression analysis employed to analyze the unbalanced panel data. Findings of the study show that return on equity and capital adequacy have negative and significant impact on NPLs. Whereas, loan loss provision and loan to deposit have positive significant relationship with NPLs. The finding of this study is important since once identifying the determinants of NPLs might enable management body to make appropriate lending policies that prevent the occurrence of NPLs. The study recommended as bank managers better emphasize the management of current assets specially loans. Furthermore, preferable for commercial banks to concentrate or diversify their credit portfolio by calculating risk relative to its return in order to increase return on equity and to reduce the level of nonperforming loans. Also the study suggest for future researcher to validate the consistency of the result and provide additional results by including other variables like priority sector loan, monitory policy and sensitive sector’s loan. Key words: Nonperforming loans, bank specific factors, macroeconomic factors

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Keywords

Nonperforming loans, Bank specific factors, Macroeconomic factors

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