Assessment of the Determinants of Non-performing Loans the Case of Commercial Banks in Ethiopia
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Date
2017-05
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Addis Ababa University
Abstract
The paper investigated the determinants of non-performing loans (NPLs) in commercial banks in Ethiopia in the period of 2007–2016. This study sought to explain the significance of interest rate, growth in GDP, inflation rate, exchange rate, real interest rate, ROA, ROE and loan growth rate on nonperforming loans in commercial banks in Ethiopia.. Explanatory research is conducted in order to identify the extent and nature of cause-effect relationships between dependent and independent variables. The study used secondary data collected from eight purposively selected commercial banks in Ethiopia. Econometric regression analysis was used in establishing the significance of the relationship. The paper found that the level of NPLs can be attributed to both macroeconomic conditions and banks’ specific factors, though the former set of factors was found to have a relatively low explanatory power. From the macro determinants, Real interest rate has positive relationship with NPL which are statistically significant at 1% level of confidence. ROA and ROE from bank specific factors have negative and significant relationship with the NPLs in commercial banks in Ethiopia. The outcome of this project firstly would enable commercial banks adopt workable strategies, benefit to the Ethiopian banking and non-banking financial sectors as a whole, and serve as a source of reference for other related research works in the future. Government Expenditure, Import & export of the country, foreign currencies availability, political stability, and competition in banking industry are recommended for further studies.
Key words: Nonperforming loan, Return on asset, Ethiopian commercial Banks, Real GDP, crossectional data, Inflation.
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Keywords
Nonperforming loan, Return on asset, Ethiopian commercial Banks, Real GDP, crossectional data, Inflation