Determinants of Nonperforming Loans: Evidence from Commercial Banks in Ethiopia

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Addis Ababa University


The aim this study is to examine three bank specific and three macroeconomic determinants of nonperforming loans proposed by the literature in the Ethiopian banking system for the period 2005 to 2013 using Arellano Bond (1991) first difference GMM estimation method. The three bank specific factors are ROA, capital to asset ratio and loan to deposit ratio and the three macroeconomic factors are real GDP growth, unemployment and inflation. The estimation result indicates that the coefficient of lagged dependent variable was between 0 and 1 as expected. Profitability and capital adequacy both showed significant (p<0.05) negative effect on NPL. Loan growth has also shown significantly (P<0.05) and positively effect on NPL. However the three macroeconomic factors have insignificant (p<0.1) effect on NPLs. The model was tested for over identification problem by Sargan test as recommended by Aellano Bond (1991). Further two autocorrelation test, AR (1) and AR (2) were conducted to test the assumption of no autocorrelations in the error term. The test result rejected the null hypotheses confirm the validity model assumptions. The results of the research benefit specifically bank managers and financial sector regulatory body.



Bank specific determinants, GMM estimation, Macroeconomic determinants, Nonperforming loans