Determinants of Asset Quality, in Ethiopian Commercial Banks
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Date
2025-05-07
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A.A,U
Abstract
The stability and performance of the banking sector are critically influenced by the quality of its
assets. This study investigates the key determinants of asset quality among commercial banks in
Ethiopia. Using panel data from Sixteen Ethiopia commercial banks which are purposely
selected from thirty commercial banks that operate in Ethiopia based on asset size and been
established and fully start their operations before the year 2014. The period of the study has
covered the year from 2014 to 2023. The study employs a quantitative research approach,
incorporating fixed effects and random effects models to examine the relationship between asset
quality measured primarily by the non-performing loan to total asset (NPLTR) and a set of bankspecific
and macroeconomic
variables.
The findings reveal that bank-specific factors such as Bank size, capital adequacy, cost of funds,
return on asset and loan to deposit ratio significantly affect asset quality. Additionally, from
macroeconomic variable, which is inflation, exhibit a notable influence on non-performing
loans. The results indicate that high credit expansion without strict risk assessment mechanisms
tends to deteriorate asset quality, while sound capital positions and efficient management
improve it.
The study concludes that both internal banking practices and external economic conditions play
a crucial role in determining asset quality. It recommends that Ethiopian commercial banks
strengthen their credit risk management frameworks and that policymakers ensure a stable
macroeconomic environment to safeguard the health of the banking sector.