Causes of Non-Performing Loan in Ethiopian Commercial Banks: The Case of some Selected Commercial Banks.
No Thumbnail Available
Date
2022-02
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
A.A.U
Abstract
The purpose of the study was to understand the causes of non-performing loans in Ethiopian commercial banks, with a focusing on some selected commercial banks. Descriptive research design and mixed (qualitative and quantitative) research approach were used. The researcher has purposefully targeted nine commercial banks in Ethiopia for the study's convenience. The data was gathered from a total of 90 respondents who were selected at random and additional 15 key informants were selected purposefully. The data collected from respondents and secondary data were analyzed quantitatively and the data from the interview was analyzed qualitatively. Following this the researcher classified the factors in to three sub determining factors namely, bank specific factors, borrower specific factors and external (socio-cultural, economic, political, legal and environmental) factors. As the finding indicates, the bank specific factors include, higher risk appetite, over trading /financing, poor portfolio diversification /excessive lending to certain sector/region or product, excessive dependent on collateral than viability of a business, absence of due care /analysis and approval process not being prudent, ignorance of the bank's credit policy, requirements due to management's or customer's pressure, incomplete documentation, fraud and forgery, easily admitting/recruiting borrowers, unfair bank competition in recruiting customers rather than setting own credit standard, poorly negotiated credit terms, conditions and lax credit terms, absence of follow up, support and monitoring to check early symptoms and credit performers’ capacity limitation (poor credit appraisal, failed to detect possible credit risks). The study also showed, in the umbrella of borrower specific factors, fund diversion (not using the fund for the intended purpose), business failure, some customers’ intentional default (willful default), poor business and/or working capital management. Lastly other major causative factors under external factors were indicated in the finding like, political & civil unrest, restrictive laws in certain sectors, capacity limitation of supervisor’s organization and intervention of external body in credit decision, absence of black listing of defaults at national level, bad credit culture and deteriorating integrity in as society, society’s culture one does not buy foreclosed property of others, inflation and deflation, market problem (for both input and out puts), price escalation of inputs, shortage of rain fall, natural disaster, flooding, draught, volcanic eruption in the low land and absence of improved technology to support and control environmental happening.
Description
Keywords
Bank specific factors, borrower specific factors, external (PESEL) factors