Determinants of Nonperforming Loans and their Impacts on Financial Performance-empirical Study on Commercial Banks in Ethiopia
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Date
2018-03
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Addis Ababa University
Abstract
This study examines the bank-specific and macro-economic determinants of Non-performing loans (NPLs) of commercial banks in Ethiopia. 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 seven commercial banks in Ethiopia and relevant data on macroeconomic factors considered for the period from the year 2007 to 2016. As noted by Sharon (2007), loans have a vital contribution towards development of economy. However, its nonpayment also leads to incidence of huge loss on banks in particular and country in general. Hence, this study was conducted to examine both banks specific (loan to deposit ratio, capital adequacy ratio, return on asset and return on equity) and macroeconomic (lending rate, inflation, gross domestic product and effective tax rate) determinants of NPLs of commercial banks in Ethiopia. To this end, the researcher has selected seven senior commercial banks in Ethiopia judgmentally. This study used unstructured interview and secondary sources of data, which is panel data in nature, over the period 2007-2016 These data were collected from NBE, MoFED and CSA. Furthermore, fixed effect model was used to examine the determinants of NPLs. This research is an explanatory research design that identifies the cause and effect relationships between the NPLs and its determinants. The finding revealed as Effective Tax Rate had positive but insignificant effect on NPLs of commercial banks in Ethiopia. However, bank profitability measured in terms of Return on Asset and Return on Equity and banks’ capital adequacy ratio had negative and statistically significant effect whereas average lending rate, inflation rate and gross domestic product had positive and statistically significant effect on NPLs of commercial banks in Ethiopia. The finding of this study is significant since once identifying the determinants of NPLs might enable management body to make appropriate lending policies that prevent the occurrence of NPLs. Furthermore, the study recommended as bank managers should emphasize the management of current assets and loans than fixed assets in order to reduce the level of nonperforming loans. Besides, it is better for the loan officers to provide financial counseling to the borrowers on the wise use of loan and also to make decision on timely fashion to meet their need.
Description
A thesis submitted to
Addis Ababa university college of business and economics department of Accounting and Finance presented in partial fulfillment of the requirements for the degree of masters of science (MSC) in accounting and finance
Keywords
Bank specific factors, Nonperforming loans, Macroeconomic factors