Determinant of Non Performing Loan in Ethiopian Private Commercial Banks: With Emphasis on Manufacturing Sector
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Date
2017-01
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Addis Ababa University
Abstract
The main goal of Ethiopian private commercial banks (EPCB) is to operate profitably in order
to maintain its stability and improve growth and sustainability. However, EPCBs experience
high levels of non-performing loans. This trend threatens viability and sustainability of banks
and hinders the achievement of their goals. This study was aimed at assessing the determinants
of non-performing loan growth rate. Specifically the study sought to establish the effect of
microeconomic variables (deposit Interest rate, exchange rate and annual inflation rate), bank
specific (loan to deposit ratio, credit monitoring and follow-up and loan growth rate) and
business characteristic (business profit margin and nature of business). The study was used both
primary and secondary data. The study target population comprises six Ethiopian private
commercial banks and 12 manufacturing sub sectors (food and beverage and textile). The study
adopts a mixed methods research approach by combining documentary analysis (structured
review of documents) and in-depth interviews. More specifically, the study reviews the financial
records of six private commercial banks in Ethiopia and relevant data on macroeconomic
factors considered for the period from the year 2000 to 2015. The sampling of the study includes
six private commercial banks, from 16 private commercial banks based on their share of total
outstanding loan. The collected panel data is analyzed using descriptive statics, correlation
matrix and multiple linear regression analysis. The findings of the study show that business
profit margin, deposit interest rate, loan growth rate, loan to deposit ratio, credit monitoring and
follow-up and nature of business statistically significant relationship with banks’ NPLs. On the
other hand, variables like exchange rate and inflation rate were found to be statistically
insignificant. Base on the finding the study recommended that Loan growth, business profit
margin, loan to deposit ratio and deposit interest rate were significant driver of NPLs, hence
focusing and engendering the institution alongside these indicators could reduce the probability
of NPL in Ethiopian private commercial banks
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Ethiopian Private, Emphasis on manufacturing sector