Determinants of Non-performing Loans: Empirical Study on Ethiopian Commercial Banks

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Addis Ababa University


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 eight commercial banks in Ethiopia and relevant data on macroeconomic factors considered for the period from the year 2000 to 2011. The findings of the study show that, loan growth, financial performance, operational efficiency, effective exchange rate, inflation rate and gross domestic product have negative and statistically significant relationship with banks’ NPLs. On the other hand, variables like bank size and state ownership have a positive and statistically significant relationship with banks’ NPLs. However, the relationship for average lending rate and income diversification were found to be statistically insignificant. The study suggests that focusing and reengineering the banks alongside the key drivers of NPLs could reduce the probability of loan default in Ethiopian commercial banks



Empirical study, Ethiopian commercial