Undeterred Non-Performance Loans in Development Bank of Ethiopia: The Role of Agricultural Project Loans (2007-2019)
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Date
2020-06
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A.A.U
Abstract
Non-performing loans (NPLs) pose a great risk on a macroeconomic stability as well as Banks survival. NPLs are loans whose credit quality has deteriorated such that full collection of principal and/or interest in accordance with the contractual repayment terms of the loan and advances are in question. Based on the existing evidence and reports the level of NPLs at DBE is very concerning. In this study, we explore both the extent and effect of the agricultural loans on non-performing loans of the Development Bank of Ethiopia. The general objective of the study is to analyze the role of agricultural loan on non-performing loan (NPL) of the Development Bank of Ethiopia. Specifically, the study identifies the impact of agricultural non-performing loan on the overall non- performing loans of DBE and examines nature and characteristics of non-performing agricultural loans. This study uses binary logistic regression to predict Effect of agricultural project loan on loan performance of DBE, by taking all agricultural projects loans (n=726). Overall, the study finds that significant proportion of the loan is Non-performing largely orchestrated by defaults in Fiber Crops and Oil Crops. Investors in horticulture industries has better performing loans. Non-Resident Individual, Regional Government Federal Government, Micro Enterprise, Associations have a high Non- performing loan than private limited companies and resident individuals. The overall high nonperformance of governmental and government affiliated institutions is more likely to be associated to high risk taken by the policy bank to provide high risk loans without adequate collateral or appraisal procedures. In comparison, loans with high interest rate, approved by district banks, medium size loans ranging between 2.5 to 10 million were more likely to fall under non-performing loans. Over the past decade loans taken for Fiber Crops largely yielded Non- performing loans. The lending interest rate 12% is much more like to yield Non –performing of Agricultural project loans than interest rate 8.5%.9%, and 9.5% .The study recommends that the management Special attention and close follow-up is essential on Agricultural projects in order to minimize NPL. This will reduce default and enhance loan collection of the bank and proper Implementation of NPLs Reduction action plan strategy combining quantitative and qualitative variables in as effects of agricultural performance could be considered in future.
Description
A Thesis Submitted for the Partial Fulfillment of the Requirements for Degree of Master of Science (Msc) in Management
Keywords
Agricultural Project Loans, Development Bank of Ethiopia, Loan performance